Wockhardt’s earnings are likely to continue growing at 25%

Investors of Wockhardt Pharmaceutical should not fret much about the reported loss in the quarter to March given the fundamentals of the company.

The company reported a net loss of Rs 192 crore in the March quarter. This loss is due to exceptional items of Rs 450 crore, which included impairment of goodwill and provision for debt restructuring. However, these are noncash one-off items and will not have any impact on the company’s operations and cash flows.

A major concern for the company is its ability to pare its high debt. At the end of March 2012, the company had a total debt of Rs 2,967 crore (down 23% YoY) and a cash of Rs 700 crore (up 45%). The cash holdings were boosted mainly because of higher operating cash flows from strong earnings growth. This means a net debt (total debt less cash) of Rs 2,267 crore.

On annualising its latest quarter adjusted profit of Rs 261 crore and assuming no growth, the company’s net profit for FY13 will be Rs 1,040 crore. Besides this, Rs 1,280 crore projected from the nutrition division sale to Danone should place the company in a comfortable position by the end of FY13.

Wockhardt has been growing consistently over the past few quarters. For the March 2012 quarter, the company reported a YoY net sales growth of 32% and adjusted net profit growth of 57% with an operating margin of 34%.

Going forward, Wockhardt’s earnings are likely to continue growing at 25%, mainly driven by its US business. The contribution of the US business has more than doubled in the past two years. It now contributes almost half of the company’s revenues and is expected to grow at 25% for the next two years.

The company’s stock gained 8% on the result announcement and has gained 160% since the beginning of the calendar year. But given the steady performance, its valuation appears compelling. Its stock is trading at seven times of its expected FY13 earnings compared with 12-15 times its peers.