Saving Wockhardt
Wockhardt Limited has always been a pioneer in the Indian pharma space. Led by the indefatigable Habil Khorakiwala—a Master’s in Pharmaceutical Science from Purdue University—it was the first company in Asia to produce recombinant human insulin. Khorakiwala, who founded Wockhardt in the early 1960s after his father Fakhruddin Khorakiwala acquired Worli Chemicials Works in 1959, had ambitions to venture into the world of biotechnology when few were doing so in the country. He set up a biotechnology park in Aurangabad to cater to 10-15 per cent of the world’s major biopharmaceuticals, was an early mover in the world of acquisitions by snapping up Wallis Laboratory in the UK in 1998, and was also among a handful to have set up hospitals under a corporate structure.
Considering this storied history, Wockhardt’s recent, dramatic plunge in fortunes is all the more poignant. Trouble first began for the firm when it dived into the overseas acquisitions game around 2007, racking up debt of Rs 4,235 crore by December 2008. The firm also took a bath when it decided to hedge its exports in 2008— comprising 70 per cent of the company’s revenues—ploughing a deep crater in its finances as the firm now had to make provision for mark-tomarket (MTM) losses. The result of this double whammy was that its interest cost jumped 200 per cent, foreignexchange loss of Rs 581 crore and net loss of Rs 139 crore were posted for the financial year ended December 2008. This year, the numbers haven’t gotten any better.
Naturally, the big question on the lips of industry watchers and analysts is can a wounded Wockhardt survive the future years as an independent entity at a time when Indian pharma is going through its strongest litmus test yet?
The good news for Khorakiwala, Chairman, is that analysts and bankers tracking Wockhardt think that the trouble for the company is more financial than operational. “Wockhardt has a good portfolio of generic drugs and has presence in major markets like the US, Europe and India,” says Anup Kapadia, Director at investment bank Rothschild. Its subsidiaries in the US and the UK have all performed well with its UK wing posting 17 per cent growth rate against the industry’s average of 4.7 per cent—that too, during a slowdown.
Meanwhile, Khorakiwala has been hard at work trying to ease his company’s pain. “All our businesses are generating cash flow now across locations,” says he. Other than operating cash flow, he says the corporate debt restructuring (CDR) package by the firm’s Indian lenders has provided a strong backbone for its operations in the future. The company has been able to do the restructuring for loans worth Rs 1,100-1,200 crore with average interest rate of around 10 per cent compared to over 12 per cent previously. Lenders have also made a provision of priority loans for meeting short-term requirements. In addition, the promoters are expected to inject Rs 70 crore of equity into the firm. This is the right stuff for a company trying to rectify its short-term asset-liability mismatch, say analysts.
More importantly, industry watchers say that the commitment of the promoters in the company is perhaps the strongest indicator that the company will emerge from its doldrums. “Selling 3-4 assets at attracive prices in less than three months shows that the promoters are very much interested in running the company,” says a pharmaceuticals analyst, who declined to be named. He says Wockhardt could have easily postponed the sale of its assets as the CDR package had set a deadline of 2015 for the sale. Instead, Khorakiwala says the company will use around Rs 500 crore to repay the debt to its lenders from the Rs 770 crore that it will raise from the sale of three businesses. Experts say selling part of the Wockhardt Hospital (not part of Wockhardt Limited) to Fortis Healthcare for Rs 900 crore also shows commitment to pare down debt.
Still, the firm is far from out of the woods. Observers point out that Wockhardt could face some cash flow problems in the next 4-5 quarters due to declining operating profit margins, mainly due to the slowdown in the US and Europe. “The margin pressure has intensified in the wake of the economic slowdown as channel intermediaries have taken active measures to prune inventories by 50-75 per cent,” says V. Krishnakumar, Executive Director, Avendus Capital, an investment banking and stock broking firm. The pressure on cash flow can be seen from the fall in the operating profit by almost 14 per cent to Rs 441 crore in the first nine months of the current financial year over last year. However, company sources say they do not expect this to significantly impact cash flows in future, since Europe and the US look to be slowly emerging from the torpor of recession.
So, what could be some effective solutions to extricate Wockhardt from its current mess? Investment bankers say one option is to raise funds through sale of some more assets. Another is to issue equity shares. “Wockhardt still has a decent market cap and can raise additional cash through equity funding from private equity players,” says Kapadia of Rothschild. He adds that for a company like Wockhardt, private equity investors are a better bet as raising funds through qualified institutional placement (QIP) will be difficult—institutional investors may not fully understand the business in the current environment. Company watchers say that more deals to flog assets are in the works. However, the company has denied rumours of hawking its biotech division to Pfizer. Yet another option is to come back home: Krishnakumar of Avendus suggests Wockhardt have a re-look at its manufacturing operations overseas and relocate them to India in order to take advantage of cheaper costs. He adds that the firm needs to lower its fixed as well as manpower costs (especially in overseas locations) and cut back on superfluous and risk-based research and development expenditure.
Another bright spot could be the settlement of the company’s MTM forex losses with the various banks using the firm’s provision of over Rs 1,000 crore for this purpose—but Khorakiwala says the company is also disputing many of its derivatives contracts. However, a legal resolution may be years away.
Strangely enough, despite its financial travails, Wockhardt’s stock price has more than doubled since April this year, while the BSE Sensex and BSE Healthcare index are up only 55 per cent. Plus, many analysts expect the company to be able to pay off its debts in 4-5 years. This will come as a shot in the arm for a company trying hard to regain its lost lustre.
