Analysis of the deal: Wockhardt+Pinewood

Implications:

Analysis: Wockhardt: Pinewood acquisition is a small positive - Pinewood acquisition is a modest positive
By acquiring - Pinewood Laboratories, the largest generic company in Ireland, where the deal was valued at 2.1x sales and 10.7x EBITDA (June'06). Although the transaction appears very reasonably priced compared to recent generic deals (over 3.5x sales multiple), the deal can be viewed as fair noting the small addressable size of the Ireland generic market (about Euro100mn) as well as the higher exposure to the competitive low margin UK generics market (over 50% of Pinewood's revenues).

Wockhardt's strategic benefits from the deal
(a) No. 1 positioning in the Ireland generic market (15% growth and 20% market share) (b) Access to Pinewood's 200+ OTC /Rx products with a market leadership in renal therapies (c) Bigger footprint in EU and (d) EPS accretive from 1st year

Estimate 7% EPS accretion in CY07E
Pinewood Labs has a US$70mn revenue base (June'06) with about 20% EBITDA margin and it is estimated that about 7% net margin for full year CY06 (about US$5mn profit) after assuming interest cost and 12.5% tax rate. Overall, the acquisition will add about 7% to Wockhardt's CY07 EPS (Rs1.8 EPS).

Maintain Neutral; awaiting clarity on biologics, ANDAs
Our Neutral view reflects the lower than sector earnings growth in Wockhardt's business (base business and inclusive of acquisition as well) and we await visibility on key projects like scale-up of generic biologic exports and potential niche ANDA approvals. Even after building in the EPS accretion from the deal the stock trades in line with its historical P/E average (1-year 16.5x, 3-year 15x).