Wockhardt Ltd. is a pharmaceutical and biotechnology company headquartered in Mumbai, India. The company has manufacturing plants in India, UK, Ireland, France and US, and subsidiaries in US, UK, Ireland and France. The company trades in both BSE (532300) as well as NSE (WOCKPHARMA). Bulk of the revenue of the company comes from US (34%) and Europe (17%). The company is looking to expand in China (7%).
OVER THE LAST FEW YEARS
The company has put in a stellar performance over the last few years. The margins have consistently improved and debt has been brought down. The profit growth and return on equity for the last 3 years has been 69.48% and 95.86% respectively. Due to splendid performance of the company, the stock has reached a level of Rs. 2100 ($35) in March 2013
THEN THE PROBLEMS
The company has faced problems from both the US FDA as well as the UK MHRA for not implementing proper quality control. The US FDA has levied an import alert on both its Waluj Plant and the Chikalthana Plant. The UK MHRA has issued a restricted GMP to the Chikalthana plant allowing it to manufacture 10 of the 22 products. Due to the import alert the stock has been beaten down in the last 6 months. It is presently trading at a price of Rs. 356($5.93).
I do think the company is massively undervalued at the present moment and trading at a discount to its intrinsic value due to the uncertainty surrounding the import alert. I think that the company has sufficient funds to make the necessary changes and get the import alert lifted. The company has already employed the services of Lachman consultants and taken remedial measures.
The company is presently trading at a trailing P/E multiple of 3.2 while the rest of the Indian Pharmaceutical companies are trading at a P/E of 20. For the first two quarters of financial year 2014, Wockhardt has reported an EPS of Rs 29 for the first quarter and Rs. 12 for the second quarter, thus already giving it an Earnings Per Share of Rs. 41 for half the year. The US FDA levied an import alert on the Chikalthana plant in the second quarter of 2014. Even if we assume the EPS per quarter would drop to Rs.6, we get an EPS (annual) to be Rs.24 Applying this EPS to a P/E multiple of 20 we get the price of the share to be Rs.480 which is a 35% upside from the present trading range.
As I have mentioned the company is flush with cash. It has Cash per share of Rs. 96($1.6). That is roughly 27% of the share price right now.
I think the fact that insiders have been buying the stock for the last four months, substantiates my view considerably. They have bought 1.4 million shares at depressed levels and they are still buying at the time of writing this article.
The US FDA inspection will take place sometime in the first half of 2014. Even if one of the import alerts were lifted, the stock would show a sharp up move.
If the problem with FDA is not cleared, I think the proper value of Wockhardt is somewhere around Rs.500. If the problem is cleared then Wockhardt can provide an upside of nearly 200%.
The main risk is that there might be uncertainty surrounding the stock in the nearby future and that would lead it to trade at depressed levels. I would advocate a timeframe of 3-15 months for the investment to realize its proper value. The downside of the stock is limited, as the stock cannot fall a whole lot from the present levels.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: I am long WOCKPHARMA.