Wockhardt's Aug USFDA check vital for stock revival: IIFL

Pharma major Wockhardt has been battered today and the stock may pick up from current levels if the USFDA's inspection into its plant in August goes well, says Bino Pathiparampil, vice president-research, IIFL.

Pathiparampil's views come on a day when the stock has tanked 20 percent on the back of the USFDA's warnings over Wockhardt's manufacturing practices in its Waluj plant.
"Before jumping very seriously into the stock I would wait for the August inspection to go on smoothly and see if it is going to impact the company's performance and if it goes fine then probably we can look at the stock as a value pick at these levels," adds Pathiparampil.
Additionally, Pathiparampil says that Ranbaxy continues to trade at expensive levels and one must see significant improvement in base business margins before getting into the stock. Below is the edited transcript of Pathiparampil’s interview to CNBC-TV18. Q: Wockhardt has been smashed up to Rs 600. At this level how would you approach this name?
A: This stock has corrected quite a lot after the US Food and Drugs Administration (USFDA) published the warning letter on their website. The warning letter actually showed quite a few serious issues which included lack of proper quality control, lack of proper documentation of data and probably more than that the non-cooperation of officials in the plant with USFDA's inspection.
This raises some issues. The stock has fallen quite a lot and if the company is able to contain the problem to just this plant then probably there is some value emerging here. But at the same time, the investors are worried about another inspection that is coming up in Wockhardt's another plant which supplies the US market in August.
If some issue comes up in that plant as well, then we could see earnings downside from current estimated levels and that may make the stock not as cheap as it looks. That is what the investors are worried about. So, before jumping very seriously into the stock I would wait for the August inspection to go on smoothly and see if it is going to impact the company's performance and if it goes fine then probably we can look at the stock as a value pick at these levels. Q: Sometimes perception of management in these pharmaceutical companies also makes a difference. Wockhardt has been through a hellish patch already. It had begun to recover. From their own voice they are saying that they are consulting and actively talking to the USFDA. Will the market and investors give Wockhardt that line of faith or do you think people are concerned about how things are shaping up and whether this is headed the Ranbaxy way?
A: As of now, there is a lot of concern in the market as we can see from the stock price. I personally think that Ranbaxy's issues were much more serious. Wockhardt's issues as of today do not seem so serious, but at the same time that does not mean that everything can swing back to being normal in just a few months.
It could be a 1.5-2 year process before they get back to where they were a few months back before the import alert struck them. So, to that extent there is definitely quite a few issues out there, but if the upcoming inspection in the second plant goes well then probably some of these concerns which are right now impacting the stock price to this extent may seem not true. In that case, we may see some value emerging and some investor interest coming up again in the stock. But for the time being, I think the market remains concerned and that is unlikely to change for next few days. Q: Would you be more cautious on Ranbaxy Laboratories?
A: While in case of Wockhardt there is some value in the stock price in terms of a very cheap multiple, Ranbaxy still has not fallen to a level where the stock can be considered really cheap.
One can blame a few of these one off exclusivities which come once in a while and give a bump up to earnings, probably those are what that is holding the stock up there. However, on a fundamental basis, if one keeps those one-off bump ups in earnings away and looks at the core recurring earnings of the company, it is still trading pretty expensive. So, to that extent, I would not be that positive on Ranbaxy even at these levels unless I see signs of significant improvement in base business margins which has not been the case till last quarter. Till last quarter we have seen only a declining trend in the core EBITDA margin of the company. So, if we start seeing a significant improvement quarter after quarter in the core margins of the company then possibly there is a case to start looking at Ranbaxy at these levels.