>Wockhardt (AVENDUS)

Cut target price; near‐term events to determine value

Wockhardt’s 2008 results point to large uncertainty over the nearterm. While operational performance has been in‐line with expectations, excessive leverage and undisclosed hedging positions could continue to heavily influence net income. A claim of INR4.9bn on the company on forex contracts adds to the air of uncertainty. We paint two scenarios that could lay ahead for Wockhardt. Assuming the company stays unbroken and functions as a going concern, the strong visibility in operating margins would be rewarded by the market. In our assessment, this could draw a value of INR204/share, to which we assign a probability of 15%. In a second scenario analysis, an assets stripping sale of individual businesses indicates INR87/share, to which we assign a probability of 85%. Combined valuation for the company thus stands at INR104/share. Downgrade to HOLD. Near‐term movement in the stock would be driven by news flow on sale of assets by the company.

Uncertainty clouds thicken over net earnings
Wockhardt is saddled with debt, with 2008 closing at a D:E of over 3.8:1, by our estimates. The high degree of leverage would keep the company’s bottom‐line vulnerable to changes in interest outgo. In 2008, the company’s coverage ratio was a low 2.6x. We believe the number would slip further in 2009. Concern over MTM losses may persist until publication of unabridged annual accounts. A claim on the company for INR4.9bn pertaining to forex losses lies unaccounted. We assign a probability of 50%.

Scenario I: Significant upside if company stays unbroken
Assuming the company stays unbroken, the strong visibility in operating margins would be rewarded by the market. Over the last 16 months, the company has traded at an average 1‐year forward MCap/EBITDA of 2.7x. Doing away with the extreme ends of the valuation range we arrive at a steady‐state mean MCap/EBITDA of 2.5x. The company, in our view, is operationally sound with a steady growth in revenues and healthy operating margins. At 2010 EBITDA of INR9.1bn, we arrive at a per share value of INR204. Assigning a 15%
probability we draw a valuation of INR31/share.

Scenario II: Strip‐down asset valuation at near distress sale
Wockhardt has initiated the process of hiving off parts of its business in a bid to raise its cash coffers. We estimate the cumulative sale values of individual businesses would close at INR46.4bn, about 16% lower than the current EV of the company. Per share value from a strip‐down method thus stands at INR87. We assign an 85% probability, drawing a valuation of INR74/share. Weighted average value of INR104; news flow to drive momentum Our sum‐of‐scenarios valuation stands at INR104/share. Upside risks pertain to higher than estimated proceeds from asset sales and interest waiver benefits from the CDR. Above estimated losses on derivative contracts is the single biggest downside risk to our call. Downgrade to HOLD.

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