Habil Khorakiwala, chairman of Wockhardt has fought all odds in the last few years and the company is still going strong.
In an interview to CNBC-TV18’s Archana Shukla, Khorakiwala says, the company’s EBITDA margin rose QoQ for nine consecutive quarters. “We believe that we should be able to maintain the margin, if not improve upon it,” he adds.
Today, he says, the company’s balance sheet is very strong. “The debt/equity ratio is below 2. If you look at our debt to EBITDA ratio, it is also at 2. That is very healthy for any organisation. Our interest coverage ratio is something like 6-7. So, from that point of view, our balance sheet even today is very healthy. Obviously, it will be much healthier,” he asserts.
Below is the edited transcript of his interview on CNBC-TV18. Also watch the accompanying videos.
Q: You really have fought all odds and the numbers show that you have come out strong. The company has been posting profits in the last couple of quarters at the operational level. What really is driving these numbers for Wockhardt?
A: Over the last three years, since we had these financial challenges, two things have happened. One, we focus more on the business on one hand and manage the external environment. Secondly, our whole management team believed in the organisation and the company. As a result, we have reduced our operating costs significantly over the years.
During these tough times, we did not take our eyes out of research and development. Infact, we continued to invest in R&D. That not only gave confidence to our team within the organisation, but it created a future for us. We have always been focusing, for the last three-four-five years, on technology driven products for the US market primarily. That is where we have been able to introduce number of those products and that has been very successful.
Q: Thirty five percent EBITDA margins, do you see these being sustainable in the coming quarters as well? What really could help them be at this levels?
A: If you look at our EBITDA margin, three years back, it was about 18%. Previous year, then subsequent year, it moved to 24% for the year. This year, it is about 31% and 35% for quarter. Our EBITDA margin is increasing QoQ for nine consecutive quarters and absolute EBITDA also. We believe that we should be able to maintain the margin, if not improve upon it.
Q: You have taken a provision of Rs 160 crore as interest expense as part of the CDR rollout. Could you highlight where this provisioning have been taken?
A: This is basically a provisioning of interest difference of the lower interest we were paying to CDR banks. Whenever we exit in future, the differential interest was payable. That is the provisioning we have taken. For the whole year, it is around Rs 40 crore. It would have provisioning in the future.
Q: The other write-off that you have taken is on goodwill, some Rs 330 crore. What has led to this sort of a write-off?
A: This is goodwill of Wockhardt France. The auditors and our internal management team felt that because of the setbacks we had in France, this goodwill requires to be written off.
Q: Because you are restructuring your business, globally as well, could there be some more of such provisioning taken into account in the coming quarters?
A: Whatever provisioning needs to be taken, we have already taken.
Q: Your net debt position has improved substantially in the last couple of quarters. The debt/equity ratio is at 1.9. Has all the foreign currency derivatives been paid off? Where do you see this net debt position going forward?
A: All derivatives have been paid off completely. In our net debt, which two years back was 5.5, has come down to 1.9 this quarter. Obviously with the level of profitability we have and the cash flow which is generated, this debt will further go down during next 12 months.
Q: Any indications as to from 1.9 where could you see, let’s say, at the end of next fiscal?
A: It would be significantly lower.
Q: We have not got clarity on your deal with Danone. Where is it progressing? You had earlier said that you would be closing it by March of 2012. By when could we expect that to close and when the money comes in? Whenever the closure of the deal happens, what sort of impact will that have on the net debt?
A: The deal is announced, it is already in the public knowledge. Whenever it happens, we will announce that. It will further improve our debt position significantly.
Q: About Rs 1,050 crore would be coming in from the Danone deal.
A: Around Rs 1,200 crore. That will go against payment of debt and other liabilities we have.
Q: So, going forward you see a significantly stronger balance sheet for Wockhardt.
A: You are right. Today also our balance sheet is very strong. The debt/equity ratio is below 2. If you look at our debt to EBITDA ratio, it is also at 2. That is very healthy for any organisation. Our interest coverage ratio is something like 6-7. So, from that point of view, our balance sheet even today is very healthy. Obviously, it will be much healthier.
Q: There have been reports in the media saying you are looking to sell off the remaining portfolio of your hospitals business to raise some money and possibly use it to pay off your debt. Could we get clarity from you?
A: This is utter rubbish. There is news report that we are even contemplating or talking to someone to divest. Whatever we wanted to do, we have done that. Infact since then with the money we received, we are reinvesting everything in building our hospital business. We have started since then a new hospital in Goa, we have refurbished a new hospital in Nagpur. We are setting up a new hospital in South Mumbai, 350 bedded. That will be commissioned very soon. So, we have invested since then about Rs 300-400 in hospital business.
Q: Would it be safe to say that you are not looking at selling off that portfolio?
A: I said it is absolutely rubbish. The news report is highly motivated and definitely not on.
Q: The US business for Wockhardt has been doing quite substantially good. It is giving you a lot of good returns. What is the pipeline of products that you have set aside for US? How do you see that business pan out? What sort of growth can we expect in the coming quarters?
A: US is a very important part of our business. Last year, we alone grew 78%; our business is about USD 375 million there. We have a strong portfolio of products coming. It’s not in terms of numbers, we will be marketing 8-10 new products this year. But what is important that we are having two unique FTF coming this year, plus some of the products where there is a limited competition. So, it’s a very strong portfolio we have in US and I think that is what we will be building up.
We have started, in the last two-three years, additional research facility in addition to India, in UK and in US. It is these research facilities combined which is giving us the current growth and that will sustain good growth and profitability for us both in the US market and EU market also.
Q: Over 70% plus of growth in the US market, do you see that sustainable going forward now, especially now that you also have a lot of competition for your key product Toprol XL in the US where you had a fair amount of market share?
A: We have been maintaining the market share. We have been maintaining the price points. In addition, we are having a lot of new products getting introduced.
Q: If you talk about the India business where you have been very strong, you have been one of the initial guys to get into the insulin space. A lot of changes have happened in the last one or two years, the dynamics have completely changed. Companies like Eli Lilly, BI have all made a beeline to coming to India. Pfizer came in, tied up with Biocon, although latter moved out. How do you see the dynamics of the insulin market in India change? Where do you see Wockhardt positioned?
A: Diabetic is a very fast expanding area in India. Therefore, the market growth is one of the highest, about 25-30% is the market which is growing. As a company we are in entire space of insulin. It is insulin, then the long acting insulin. Glargine (Glaritus) is also we have marketed. We would be marketing some more new insulin. So, we would be a very significant player over next few years in insulin and other diabetic products. Infact in India we have about 3,000 field force. They are covering literally every nook and corner of the city. We are focusing both in critical care area and also acute care area and pain especially.
Q: In terms of expanding your presence in the diabetic space, could you also look at some tie-ups with multinationals like what other companies have done or would you still want to do it on your own?
A: We would certainly like to work on getting our products marketed worldwide ourselves. Wherever we don’t have presence, we would obviously look in those countries’ specific tie-ups. I don’t think anything will happen in near future because our objective is we first come to approval stage which may take some time. Once we have our product approval in Western countries then it will be much easier for us to have a tie-up and then value creation which we will achieve is much higher.
Q: Which would be the other therapeutic portfolios where you are focusing, besides the diabetic area?
A: Global markets, since we are off pit, not in that space, one really looks at technology and other things rather than specific therapeutic area. But to mention therapeutically we have number of products in cardiovascular area. We have the products in the Prezol kind of range of product, cholesterol reducing agents. So, these are the areas we have our significant product portfolio.
Q: In your AGM, last year, you had spoken about a new Wockhardt. You had spoken about a lot of changes in the organisational structure and the company as a whole. What are those real big structural changes that you have brought about?
A: One, you have seen this result coming out of our growth and our financial results. The underlying cause is that we have become very focused. Second, there is a great amount of team effort which is happening in the organisation.
Thirdly, I think everybody is driven to same purpose and same goal. So, we brought a lot of unity and strength into the organisation. This has resulted obviously our focus in R&D, focus in US. That is paying off extremely good result and that is continuing to happen
Second is we have developed our business model both for R&D especially at three horizon levels. We have decided that R&D would be our focus of future growth which will be driven through R&D focus on future growth. And that will be driven through R&D more than anything else.
Q: So, what sort of investments are you envisaging in your R&D?
A: We have been spending, in the last two-three years, 4-5% on our turnover. I think it will go up by 0.5-1% every year on an increasing base of sales turnover.
Q: How about restructuring your global portfolio, global businesses? You have cut down substantially on the workforce in your Negma facility. Are we seeing any sort of more similar restructuring exercises in your global portfolio?
A: This is an ongoing activity. Therefore, wherever those areas are there, we would look at it, which brings out more efficiency and cost saving, we would do that. I don’t think I could fib it out well in advance for variety of businesses.
Q: How do you see the overall global business contribute to Wockhardt at this stage? How do you see it grow because you are focusing a lot on the US, you are restructuring your businesses across?
A: Today, if you look at our organisation, 75% of my business comes out of international activities. Even rest of the world, other than US and Europe, is only 6%. So, 69% of our business is coming out of US and Europe. Obviously, US is growing much faster. Europe is growing slow. India is growing very well, rest of the world is growing very well. So, there may be marginal shift because how much more you can do over 75%. So, there would be a gradual few percentage going up.
Q: You did go through very turbulent times in the last two-three years, post 2008. What has been the learning for you from that phase of being in this business?
A: I think it was a tough time for the organisation. I think greatest learning is that it has helped everyone to focus on the key aspect of the business. When you are there in business for 30-40 years, people take a lot of things for granted. When you are in a very tight situation, obviously people revisit everything whether it is absolutely essential to do or does it create value.
Q: But do you think as a company you got swayed away by the exuberance of the financials markets in those times?
A: Our teams were getting involved into some of these areas. We have been doing for a period of time. The financial market crashed, I don’t think we knew, our team knew or were aware of what are the underlying consequences and problems. But when we had such huge problem, we dealt with it. One of the things, which we have achieved, is all our secured or unsecured lenders, we have made sure that every rupee we have received from them they are being paid and restructured.
Q: That brings me to a question on your CDR; what is your current structure with your lenders? You said you have a very good rapport when you want to pay off even a single rupee that you have taken from them. What is the structure right now? Are all the lenders on the same page as you when it comes to the CDR?
A: I think CDR is already well structured. There is nothing individually we discussed with lenders. That structure was placed three years back. As a company, we are fulfilling all the requirements and all the commitments we have made.
Q: There were some issues, when you wanted to sell-off your nutrition business to Danone to pay off your bondholders, your CDR bankers, had come out and said that that could not be done because of the CDR process. Has all that been sorted?
A: Yes, I think so. We have no open issues on that.
Q: You also have a court case going-on on the FCCB bond holders. I know its sub-judice, but there is a series of payments that you need to pay till July of this year. How is that progressing and any comment that you would want to make on that?
A: We have already made the significant part of the payment and the remaining part, which is one due in June and another in August, will be made.
Q: The stock is now reflecting the growth that the company has shown. So, in the last one-two years, we have seen it go up quite significantly. But institutional investors are still shying away from investing. How do you see that?
A: I think that was natural to happen because when the company has a financial problem and challenges till they know exactly what is the stable situation, they are keeping away. Therefore, our share price do not reflect the true value of the company even today. Our economic value to EBITDA for the current share is only seven.
Q: But with the kind of changes that you have brought about, do you see these institutional investors coming in? Are you having talks with them?
A: No, we are not discussing with any investors at all. I believe that our performance will speak for itself.
Q: And you are not looking to raise any sort of equity in the market?
A: No, there is no need to do that.
Q: Do you feel you are quite comfortable and strong with the balance sheet where you are currently?
A: Yes, I think our balance sheet as of today is strong. The level of cash we generate through the profitability you saw last 12 months will not only be continued, but it will be better in the coming period, quarters. We don’t see any need to raise additional funding.
Q: What is your vision for the new Wockhardt? In the next three years, where do you see it go?
A: We should be amongst the top leaders in the industry both in terms of the kind of impact we make in our business in terms of our sales, in terms of our profitability and the level of products we bring about.
The second aspect what I believe is important for Wockhardt is we would like to be part of a community, a society we are in. Through our Wockhardt Foundation we are doing enormous work in various healthcare related initiatives in rural market through our mobile health van which visits number of villages where there are no healthcare facilities. Infact a single van covers every village once a week. We cover a population of 25,000. We started this over a year and half back. By this year-end, we should have more than such 100 vans going around in various parts of the country.