How Wockhardt transformed from a defaulter to market favourite

Indian drug maker Wockhardt is proving there is life after debt restructuring.

After defaulting on $110 million in overseas bonds in 2009 and renegotiating payment on Rs 1,300 crore in loans, the generics maker is nearly free from a sometimes bitter process of debt recast and is enjoying a furious stock rally.

While Wockhardt's imminent emergence from India's corporate debt restructuring (CDR) system is widely seen as a turnaround success, it comes as the central bank pushes for tighter rules around the process as more companies take advantage of it.

"We are one of the very few companies in the CDR who have come out and paid everything," Wockhardt Chairman Habil Khorakiwala told Reuters at the company's headquarters in suburban Mumbai.

This year, Wockhardt has seen its shares soar nearly 350 percent to record highs, lifting its market value to $2.45 billion. Its forward price-to-earnings ratio of 12.7 times is lowest among larger-cap Indian pharmaceutical companies, most of which trade at around 20 times or more.

It recently ran advertisements to crow about its success: 23 percent sales growth in the last fiscal year and a net debt to equity ratio now below 1, reduced from 5.5 times in March 2010. After three years keeping a low profile, Wockhardt will hold its fir s t investor relations meeting next week.

"We are becoming more or less a very normal company," said Khorakiwala, 69, who formed Wockhardt in the mid-1960s after taking over his father's Worli Chemical Works. Khorakiwala, who is Sweden's honorary consul general in Mumbai, also controls a hospital chain, Wockhardt Hospitals.

DEBT AND DERIVATIVES
Wockhardt, which racked up debt when it spent $453 million on three overseas acquisitions, was pushed over the edge by losses of Rs 555 crore on foreign exchange and derivatives during the global financial crisis in 2008.

The company, which generates 75 percent of its sales abroad, entered India's CDR process in June 2009 to restructure about Rs 1,300 crore in loans, largely from Indian banks, led by ICICI Bank. Its foreign banks settled separately.

Wockhardt tried to ease its debt load in 2009 by selling its nutrition business to Abbott Laboratories Inc, but holders of its U.S. dollar convertible bonds blocked the move in court, saying they were not consulted. Last year, it announced a $355 million deal to sell the nutrition business to France's Danone, which bondholders ultimately went along with. That deal closed last month, several months later than expected.

Under a court settlement, Wockhardt will pay bondholders a last tranche of Rs 200 crore this month. It expects to exit the CDR process in a month or so.

Still pending is a Rs 940 crore defamation suit brought by Khorakiwala against the trustees of the bondholders.

TOO BIG TO FAIL?

Big companies rarely fail in India, where domestic banks, especially state lenders, tend to help companies through tough times by easing loan terms.

Critics worry about moral hazard in the CDR process, which spares banks the need to declare a loan non-performing or endure the lengthy process of forcing liquidation. For stressed borrowers, an easing of terms is better than the alternative.

Reserve Bank of India Deputy Governor K.C. Chakrabarty said recently India's restructuring process is skewed: "It's heavily biased in favour of public sector banks. It has substantial bias towards more privileged borrowers vis-a-vis small borrowers."

A central bank panel has proposed that banks book higher provisions against restructuring loans. Starting in two years, it wants most such loans declared non-performing.

CDR cases are surging in India. In the June quarter, 41 cases worth Rs 20,500 crore were referred to the CDR cell, from 18 cases worth Rs 4,600 crore a year earlier. Since the process began in 2001, 57 cases worth Rs 43,000 crore rupees have exited, of 292 accounts worth Rs 1.5 lakh crore.

R.S. Setia, general manager in charge of credit monitoring at state-run Bank of Baroda, said the Wockhardt case, which it was not involved in, has been especially successful.

"This should be a lesson for other corporate houses who believe in making hospital their permanent homes for short-term benefits," he said. "CDR enables a borrower to overcome temporary problems, but some corporates don't want to exit it."

Wockhardt's reputation and share price took a hit and it was forced to sell assets during its restructuring but its business remained robust. While Khorakiwala's promoter group had to pledge most of its 74 percent stake as collateral, it did not suffer equity dilution.

"If your business model is strong, the CDR is a good mechanism to deal with on a short-term basis," Khorakiwala said. "It did help to stabilise the company, so we could focus on our operations, and that's what resulted in the turnaround situation."


Copyright Thomson Reuters 2012