Sell Wockhardt; target of Rs 398: AnandRathi

AnandRathi's report on Wockhardt

"Wockhardt's revenue declined 13.9 percent yoy, to Rs 12.4bn, though higher than our expected Rs 10.2bn, mainly led by no impact of import alert on Chikalthana unit this quarter (to be felt 4QFY14 onwards). EBITDA margin declined 1850bps yoy, to 19.5 percent, higher than our estimated 15.5 percent, on higher gross margins; there were one-time costs of Rs 300m pertaining to FDA & consulting, which are unlikely to recur in future. Weak revenue growth and margin decline led adj. PAT to slide 61 percent yoy, to Rs 1.7bn, though higher than our estimated ~1bn."

"The company is facing various regulatory issues, including USFDA import alert at Waluj and Chikalthana units. In addition, UKMHRA has also put ‘restricted GMP' certificate at Waluj, Chikalthana and Kadaiya facilities. The company is working to resolve these issues at the earliest to limit the financial impact. However, we do not see any resolution in the near term. Hence, margins could remain constrained due to higher expenses on consultants."

Our take: "We believe revenue growth and margins could remain subdued in the near-to-mid term due to import alert on Waluj and Chikalthana units and ban on Opioid Dextropropoxyphene in India. The company has a total of 53 ANDAs pending for approval, of which, 43 are from Waluj and Chikalthana. We reduce our FY15 and FY16 revenue estimates by 16.7 percent and 7.7 percent, and PAT by 19.9 percent and 6 percent, respectively, to factor in the import alert on Chikalthana."

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