>Wockhardt (KARVY)

• Stock Update >>Wockhardt
• Stock Update >>Dishman Pharmaceuticals and Chemicals

WOCKHARDT

Revenues for the quarter are expected to move up by 17.6 % to Rs 8961 mn. The main revenue drivers are expected to be domestic formulations and formulations exports driven by traction in US. Margins for the quarter are expected to be lower from 24.9 % to 22.1 % for the quarter. Higher staff costs and other expenses have been the main reason for the decline in margins on account of new acquisitions. Profits for the quarter are expected to to be lower at Rs 719 mn for the quarter after accounting for forex losses of Rs 338 mn.

The company has yet to leverage its assets in regulated markets and biotech facilities getting scalability. We believe the FCCB redemption is a foregone conclusion. We have removed equity dilution from our model and factored redemption of the FCCB which would involve around Rs 7.3 bn which has been factored in increased loans in CY 09. We have factored interest rates on the new loans at 14 % for the CY 09. We have also reduced revenue estimates by 7.2 % for CY 09 on account of lower traction in regulated markets especially UK, France and Germany. We reduce our EPS estimates by 9.76 % to Rs 22.5 for CY 08E and by 38 % to Rs 22.3 for CY 09E. As a result of downgrade in earnings we downgrade our price target by 50 % to Rs 100 based on 4.48x CY 09E. The stock would continue to face weakness till clarity emerges on the FCCB repayment. We downgrade our rating to Outperformer on the stock.

Dishman Pharmaceuticals and Chemicals

We are reducing our revenue and earnings estimates for FY09 & FY10E mainly on back of removal of revenues estimates for two breast cancer products of Carbogen Amcis (CA) business and one anti-cholesterol product of Solvay's Vitamin D & chemicals business due to possible delay in launching of these products. In addition, the company management has indicated that there will be a shortfall of Solvay's Eprosartan Mesylate revenues for 4 months from January 2009 to April 2009. We are also introducing our FY11 initial estimates for Dishman Pharmaceuticals and Chemicals (Dishman). Despite downward revision in revenue and earnings estimates for FY09 & FY10E, Dishman is set to grow at a double digit for the next two to three years mainly on back of its strong innovator client relationships, expansion of existing contracts and addition of new contracts in pipeline. The stock is currently available at attractive valuations at PE of 10.9x on FY09 and 6x on FY10E diluted earnings basis. We maintain 'BUY' rating with the price target of Rs.155 leaving upside of 58% from current levels for next one year time frame.

Adequate revenue flow from the CRAMS segment despite temporary setback from breastc cancer products: We are marginally downgrading our Contract Research and Manufacturing Services (CRAMS) revenue estimates by 2% to Rs.7.37bn in FY09 and by 8.7% to Rs.8.67bn in FY10E due to shortfall of 4 months revenues from Eprosartan Mesylate in Q4FY09 and removal of revenue estimates for 2 breast cancer products (US$5mn in FY09 & US$10mn in FY10E). The high margin CRAMS business that contributes more than 70% to total net revenues, expects to grow at a CAGR of 17.8% from FY08 to FY11E mainly on the back of consistency in revenue flow from base business of CA segment and Solvay.

Wider innovative client base to act as cushion for CRAMS business: Dishman has currently got predominant presence in the global CRAMS market by maintaining long lasting relationship with global pharmaceutical innovator clients. By reducing dependency from single client (current ratio between Solvay to Non Solvay- 20:80), Dishman has expanded its client exposure to key global pharma majors like AstraZeneca, Boehringer, Ferro Corporation, GSK, J&J, KRKA, Merck, Nippon Gosai, Novartis, Pfizer, Sanofi Aventis and Sepracor.

To see full report: WOCKHARDT