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Recommendations

Wednesday, October 04, 2006

Sharekhan Investor's Eye - Oct 4


Wockhardt
Cluster: Ugly Duckling
Recommendation: Buy
Price target: Rs552
Current market price: Rs402

Pinewood comes at a fair price

Key points

  • Wockhardt has acquired a 100% stake in Pinewood Laboratories, in an all cash-deal worth $150 million. Pinewood is the largest and fastest growing branded generic pharmaceutical company in Ireland.
  • Pinewood has recorded revenues of $70 million, earnings before interest, depreciation, tax and amortisation (EBITDA) margins in the range of 23-25% for the year ended June 2006. It has been growing at a compounded annual growth rate (CAGR) in excess of 20% over the last five years.
  • The Pinewood acquisition will enable Wockhardt to increase its footprint in the European markets of the UK, Ireland and Germany. Contribution from Pinewood would increase Wockhardt’s European business to over $200 million.
  • The acquisition price for Pinewood seems reasonable at a price/sales ratio of 2.1x when compared with similar deals with price/sales ratios in the range of 2.9-4.2x. The valuation of Pinewood seems fair even when evaluated on an enterprise value (EV)/EBITDA basis.
  • Based on back-of-the-envelope calculations, we believe that Pinewood would generate incremental earnings of Rs0.24 for Wockhardt. The contribution to earnings is likely to improve as the integration of Pinewood with Wockhardt progresses and Wockhardt starts deriving manufacturing and cost synergies from the acquisition.
  • At the current market price of Rs402, Wockhardt is quoting at 14.5x its CY2007E estimated earnings, on a fully diluted basis. We maintain our Buy recommendation on Wockhardt, with a price target of Rs552.

SECTOR UPDATE

Cement

Smart bounce back
In line with our expectation, for the month of September the cement majors (Gujarat Ambuja, ACC and the AV Birla group) have reported a very healthy growth in their dispatch numbers. Cumulatively these majors have reported a strong growth of 16% in their cement dispatch numbers. This is a bounce back after a subdued dispatch growth in the month of August 2006, which was affected by heavy rains in most parts of the country.

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