Wockhardt - Import alert to impact performance; Hold - Anand Rathi

Revenues, EBITDA margin constrained. We expect a decline of 29% yoy in revenue for Wockhardt due to: (1) Import alert on its Waluj plant and Chikalthana unit by the US FDA, which would hit US supplies; and (2) impact on domestic business from product ban and new pricing policy. Hence, we expect EBITDA margin to decline 2250bps yoy, to 15.5%. Constrained revenue growth and decline in EBITDA margin, along with lower other income, would cause 77.5% yoy dip in adjusted PAT.

Import alert likely to hit growth momentum. We expect a decline of 52.6% yoy in the US business, as product supply was hit owing to an import alert at the company's Waluj facility as well as Chikalthana unit. Growth would remain negative in the coming quarters for the US market as base effect kicks in and unlikely site transfer in near term. We also expect decline in revenue from domestic formulations due to impact of implementation of new drug pricing policy and ban on sale of Proxyvon in India. EU and ROW would report positive revenue growth.

Chikalthana unit also under import alert. The company has also received import alert status from USFDA for its Chikalthana unit that contributed US$230m revenue in FY13. We believe the resolution of the import alert at both Waluj and Chikalthana units would take over a year, considering similar situations with other companies in the past and issues raised by USFDA. We don't expect site transfer of products in near term.

Our take. In the past two years, Wockhardt has commendably turned around, largely driven by its balance-sheet restructuring, scale-up in its US business and rationalising of its overall operations. However, recent import alerts would hit the momentum over near-to-mid term. We maintain Hold, with a target of Rs. 450 based on 8x FY15e earnings. Risks. Currency fluctuations, regulatory hurdles.

Source : Equity Bulls

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