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Monday, April 5, 2010

Investors see positive signals in Wockhardt’s new game plan

The Wockhardt Ltd deal with Abbott Laboratories Ltd to sell its nutritional products business was crucial to its debt restructuring. It had to raise around Rs800 crore from divestments and this sale would have contributed a large part. Abbott was to pay around Rs630 crore for the business. Its failure should have been seen as a setback but strangely, Wockhardt’s share price was up 3.3% on Wednesday.

What silver lining could investors have possibly spotted? The nutrition business is a prized asset and was being sold in a distress situation, but at a good price. But retaining it could actually benefit Wockhardt as it is a high growth potential business. Another possibility is that Wockhardt may first negotiate terms with its lenders for agreeing to this sale, put it on the block again and maybe get a higher price. With its debt restructuring package progressing, its bargaining power may improve. Or Wockhardt may come up with an entirely new restructuring plan which not only lowers debt but also unlocks value for shareholders.

consumer companies are eyeing the nutritional business. Wockhardt’s division had a turnover of Rs149 crore and Ebidta (earnings before interest, depreciation, tax and amortization) of Rs31 crore in 2008. It also has well-known brands like Farex and Protinex in its portfolio. Losing it may have affected growth for the company, since its overseas revenues are under pressure. Its domestic business has been doing well, with branded product sales rising by 24% in 2009. Its UK business is also doing well, with sales rising 21%. But its US business appears to under pressure, as the company’s overall consolidated sales grew by just 1.1% during the year.

While sales growth has been disappointing, profitability has declined, with operating profit margin down by 3 percentage points. It incurred a loss of Rs435 crore in 2009 compared with Rs139 crore a year ago. On the brighter side, its December quarter loss was Rs181 crore, less than half that in the same period a year ago. Lower interest costs, provision for premium on foreign currency convertible bonds and lower mark-to-market losses were the main contributors.

In the US market, Wockhardt got Food and Drug Administration approval for five products in the December quarter and has got two more in the March quarter. With management focus shifting from saving the company to getting back growth, its operating performance may just improve. While that will be a long-term positive to look for, its new game plan to raise cash is what will drive sentiment in the near future.

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