FC businessman of the year
Dec 30 2012 , Mumbai
Every yearend the senior FC editorial team independently picks a businessperson for honours in a selection process that involves nothing more than intense and independent internal assessment, unaided by any external agency inputs. This year Rahul Bhatia, group MD of InterGlobe and chairman of Indigo Airlines, was also considered. He did not make it because not much is publicly available on him personally nor the internal mechanics of his businesses. Cognizant founders too were first short listed and then unlisted, because it was thought prudent to await the company’s full-year performance.
Khorakiwala won hands down as much for his fighting spirit as the way he turned around Wockhardt (it began life as Worli Chemical Works) after things started going bad following a flurry of foreign acquisitions, a bruising brush with the derivatives market and body blows from its FCCB holders.
Things were so dark at one point that the statutory auditor resigned on the point whether or not the company was a going concern. Wockhardt’s stock was decimated and lost almost four-fifths of its value. How did he nurse back what was essentially a hopeless ICU case?
By the simple expedient of standing by the company; he didn’t run away, says R Raghutama Rao, MD of the consultancy IMACS.
By successfully staving off all threats, says a legal expert clued in on Wockhardt’s travails.
But perhaps, his daughter Zahabiya, Wockhardt Hospitals MD, knows best: “Even during the crisis my father was always a cool, calm and composed person. He came home on time and kept a proper work-life balance.”
It’s thanks to that cool temperament that Wockhardt today is one of the best performing pharmaceutical stocks; with a market capitalisation topping Rs 17,000 crore. More, the company seems set to exit the corporate debt-restructuring scheme.
From Rs 250 in January the stock has gone past Rs 1,500. “The speed with which the stock has turned around… is amazing,” says Sony Mathews, chief manager of investment advisory services of Geojit BNP Paribas.
To be sure, this could have had something to do with the low floating stock with public shareholders. “Among public shareholders only 46 individuals hold more than Rs 1 lakh worth of stock each (their combined stake is 5.2 per cent). Another 7.5 per cent is with those with shares worth less than Rs 1 lakh,” points out Mathews. On top of this, 90 per cent of the promoter stake is pledged. Entry into and exit from the company’s stock is an expensive proposition. Therefore, it is relatively easy to influence the stock price with a small purchase or sale.
But that hardly detracts from the credit that due to Khorakiwala. Wockhardt’s health has been restored primarily by rescheduling bonds, selling non-core assets (the animal healthcare division, for example; sold in 2009 for Rs 170 crore) and improving operations in general. “The turnaround is seen from the climb in its stock price,” agrees K Raghavendra Rao, CMD of Orchid Chemicals.
The ongoing convalescence is seen in the 29 per cent growth in sales in July-September and the 85 per cent growth in operating profits over the same quarter of 2011. That over a three-year period, operating costs have been reduced from 41 per cent of sales to 28 per cent, is a testimony to tight ship that Khorakiwala runs.
Khorakiwala explains the new Wockhardt: “We have learnt to do more and more with less and less. Our R&D department has become far more focused on value creation.”
The years since 2008 have been trial by fire for Wockhardt. Clever management of limited resources and assets saved it from turning belly up. In between, hedge fund QVT sued it, seeking the then current market price for conversion of the convertible bonds if the company could not redeem them in full on maturity as agreed upon. Sun Pharmaceutical also mounted pressure after buying some of the bonds in an overseas deal and called for repayment or liquidation of Wockhardt itself.
Khorakiwala thwarted those pressures effectively: giving in would have meant giving up. He began to sell assets and restructure the business – and in the process, clean up the balance sheet. One cost head where he brought about a sea change was R&D. In July-September 2012 it brought its accounting for R&D expenditure in line with other drug firms by expensing off Rs 437 crore of carried forward cost of intangible assets and product under development. Till then, Wockhardt used to capitalise the predominant share of R&D expenditure.
“Wockhardt invests between 5 per cent and 6 per cent of sales in R&D, but only 2 per cent is expensed in the profit and loss account. Other big drug companies expense the entire cost to arrive at their profit figure,” says Deepak Malik, senior research analyst of Emkay Global Financial Services.
This is exactly what Wochardt plans to do. Says Khorakiwala: “Going forward, all R&D expenses will be expensed.”
Among other measures to better health was the writing off the entire goodwill value of Rs 621 crore of its French operation in the same quarter. It has stopped manufacture there and made big cuts in workforce. The acquisition, Negma France, had given Wockhardt a nightmare. It had paid a fancy price for Negma France in a season when buying overseas assets was a fad, according to Ranjit Kapadia, senior vice-president of Centrum Broking.
Khorakiwala says this was the ‘only’ acquisition that went wrong and blames the challenge to the Diacerien patent by generic firms.
Another acquisition, in Germany, did not go well either, and the company got rid of for Rs 120 crore in 2009. “We did not see any future in that market,” says Khorakiwala.
Around the time the foreign acquisitions -- and indeed the entire world economy -- were turning bad, Wockhardt began to look inward. It realised the strength in its own people and the Indian market and started rebuilding for an eventual turnaround – not an easy job when it was constantly trying to fight off lawsuits from creditors and bondholders baying for its blood.
It helped that the majority of Wockhardt employees trusted Khorakiwala. They believed him when he said the company would rise again. “Our people managed their affairs as if it was their own company. They responded to the crisis of their own volition. Things happen when a large number of people respond positively,” says Khorakiwala.
His cousin, Zoher Khorakiwala, CMD of Monginis Foods, quotes him as always saying: “It’s my team which does it.” He says Habil has always believed in getting the best people and have trust and faith in them.
Y K Hamied, Cipla chairman, salutes: “Hats off to Habil. What he has done in the past one year has been super remarkable. By the looks of it, it will keep on improving.”
Coming from a peer (and competitor), that’s praise fit to be encased in a gilded frame. Yet, the turnaround is more remarkable for how the debt has been and is being gradually whittled in Wockhardt Hospitals, the privately held business of the Khorakiwalas, in the face of a failed IPO. At one point, the promoters were overleveraged to the extent of 4:1 debt:equity and the attempt was to soften this by going public.
By the IPO, announced in February 2008, Wockhardt Hospitals was to sell 28.77 per cent of its capital. The issue, graded 4 out of 5 by Fitch, was to part fund a Rs 569 crore investment to expand the hospital business and also prepay some of its short-term debt. But the market went bad; the firm had to sharply cut the price band. Even this did not help and the IPO was called off. In the long aftermath, the Khorakiwalas had to sell prime metro hospitals to Fortis Hospitals in August 2009 for Rs 909 crore. As a result Wockhardt Hospitals lost 85 per cent of its revenue stream and 70 per cent of the beds. But the deal helped the company retire a debt of Rs 500 crore.
Khorakiwala also entered into negotiations with financiers to reschedule debt. The derivatives problem was sorted out when he settled claims at a maximum of 25 paise to a rupee for those who sought repayment in cash. Others were given preference shares maturing in 2018 for the value of the derivatives. Bondholders who had filed winding up petitions were held at bay till the company was able to find a buyer for its nutrition business.
“Khorakiwala played hardball at the negotiations; not afraid to get up and walk out of the room if need be,” says an official who has seen him at close quarters. The bondholders had nixed a July 2009 agreement for sale of the nutrition business to Abbott Laboratories for $130 million. Khorakiwala was back at the negotiating table and within a year signed an agreement with Danone of France for almost 2.7 times the amount Abbott had agreed to pay. Advisors who worked with him say he was lucky because by 2010, the global economic slide was reversing, whetting buyers’ appetite again.
Khorakiwala describes how he pulled it off: “We ran a process with 10 to 15 interested buyers. I said that they would have to first convince me that they are strategic and not value buyers before I agreed to consider selling the business to them. In 2008-09 I needed to sell, but in 2010… the value extraction was better.”
His advisors say, in fact, he extracted an India entry premium from Danone. “There was no other business of this kind available on sale in India,” adds Khorakiwala. Clearly, he got the timing, and thus the price, right in this deal. (With that acquisition, India has become Danone medical nutrition’s second largest Asian market. Plus, it got Farex, an extremely popular baby cereal.)
Danone has a perspective of why Wockhardt sold. “It was a question of focus for them. They were up against a big established player like Nestle and needed expertise in competing with a global player; this we have,” says Darius Kucz, Dannone’s vice- president for Asia-Pacific region.
“It was wise of Wockhardt to focus on what they do best,” as Laurent Marcel, MD of Danone International, puts it.
At the time of the deal with Fortis, Khorakiwala announced he would use the proceeds to set up five new hospitals to make up for the loss of hospitals and beds. In the first three years he had a sort of restraint, as Wockhardt Hospitals had to sign a non-compete agreement that forbade it to set up hospitals in Bangalore and Kolkata for that period.
Three years on, the Khorakiwalas have been able to open one new hospital: a150-bed multispecialty hospital in Goa. Another, costing around Rs 300 crore, in Mumbai, is delayed and may open in the first half into the New Year. But today, it has a cosmetic surgery business administered through Wockhardt Institute of Aesthetics, Goa.
By no means is this galloping march. The inability to quickly create new hospitals illustrates the scale of the challenges that the father-son duo of Habil and Murtaza Khorakiwala has to face. In the process, they also suffered the ignominy of seeing credit rating agencies withdraw their ratings for the firm for reasons of inadequate information; most stock analysts also stopped bothering in the absence of investor communication.
The business of creating and running hospital is expensive, and Khorakiwala says not everyone does well in this business in terms of return on capital. Experts agree that the hospital business is cash positive, and net profits may take a while coming.
Khorakiwala’s view is that, if you run it the right, profits will follow. The company has had a relationship with Harvard. “Over the past 13 years, we leveraged the relationship to run our hospitals in a contemporary international way…. Our success has been in getting doctors to go to smaller cities,” he adds.
Ashwini Picardo, associate director of India Ratings, thinks the Khorakiwalas did right by selling assets and launching products in the dog-eat-dog US market. It helped the turnaround.
It is generally agreed that Wockhardt’s problems arose mainly for debt-funded acquisitions in 2006-07 that turned awry in the next year as the world economy went into a tailspin. They spent $150 million in 2006 to buy Pine Wood in Ireland, $265 million to buy Negma and $38 million to buy Morton Grove in 2007. “We typically bought loss- making companies and turned them around,” explains Khorakiwala.
It backfired elsewhere. The stock market disapproved and the Wockhardt share took a pounding. Emkay Global data show the company had negative free cash flows between 2006 and 2010. Experts say Wockhardt overdid it by buying more companies than financial prudence would allow; some of these acquisitions became millstones. “Khorakiwala became overconfident and the currency crisis hit them hard,” says a top consultant.
The product launches in the US since July 2010 (Toprol XL, Flonase, Stalevo and Fexofinadine OTC) has surely given a leg up to revenues. It is a good move. Today, the US as a market gives the company more revenue than Europe does. “India is only 1 per cent of the global medicine market by revenue, Europe is between 15 and 20 per cent; the US is 35 per cent. We were only in India and thus restricted. The acquisitions allowed us to become a global company with 80 per cent of our revenue now coming from outside India,” said Murtaza Khorakiwala.
Besides factories in Ireland and the US, Wockhardt also runs a custom research and manufacturing unit in the UK. “We have R&D facilities in global markets to help fill skill gaps here. Our chief scientific officer is based overseas,” said Khorakiwala.
According to him, one of the reasons employees did not lose hope is that they could see that even in the downturn the company continued to invest strategically in creating manufacturing capacity in the US and also in R&D. “People are the most important resource in this business and Khorakiwala has good people with him; he incentivised them,” says Pulin Shroff, MD of Charak Pharma.
“We knew we have a pipeline of drugs that would deliver in two to three years; it takes that long from the application stage to making actual supplies of a drug to the US market,” says Khorakiwala.
Wockhardt is now focused on identifying niche drugs in the US, each typically generating sales of up to $300 million and difficult to make. Khorakiwala thinks big drug firms won’t be excited enough by this to try and tap these niche opportunities. So, price competition will be lower and margins higher in these segments. “Every year we will have 12 to 15 new launches to keep the momentum going.”
Emkay’s Malik reckons that if the US market continues to perform Wockhardt will have no net debt in a year. Also, its business profile in India is robust, facilitating a quick turnaround, says Picardo of India Ratings.
With net debt getting close to zero and business doing well, will the company be again prowling around for acquisitions? One bitten twice shy Khorikawla answers: “We have no plan to go in for inorganic growth in the near future. Instead, we plan to intensify our focus on R&D and increase R&D expenditure by another 2 per cent to 3 per cent of sales; we believe this is the core of our business.”
No doubt Wockhardt has been pulled back from the brink, but nagging doubts about the future remain. Financial analysts are generally skeptical of the quality of its accounts and suspect the transparency of its management. They have their fingers crossed on whether its US performance will fall or whether the stock has already priced in all the positives. “The potential of an upmove from here is limited as the cream has already been stolen,” says a skeptical analyst.
To that Murtaza’s answer is that the US, the UK and India will be the company’s focus geographies, and if it can maintain a 30-35 per cent operation profit margin on growing sales, it would be home and dry.
But some analysts point to Torpol, one of its star launches in the US. Dr Reddy’s, Sandoz, Cadila, Intas Pharma and many more are eyeing the same drug in the same market. Wockhardt earned almost a fifth of its profits from this drug and could feel the pressure of other players entering. The counterview is that the other companies have priced themselves far above the Wockhardt drug. So, the risk to it is mitigated somewhat. Wockhardt is on the watch list of every financial analyst and fund manager.
An aggressive Khorakiwala has learnt his lesson, says a veteran drug industry analyst. It is pointed out that he is keeping the balance sheet simple and healthy; yet the company is not commanding PE ratios of 20 that companies of this size get.
Wockhardt’s defence system, as explained by Murtaza, goes thus: the company has a short-term, medium-term and long-range R&D plan to create products that can be differentiated in the market and have limited competition. In one to four years branded generic products and bio-similars will be developed for emerging markets. In the four to six years bio-similars for developed markets will be hopefully developed. “And in the long term we want to develop new chemical entities for areas such as anti-infectives,” says Murtaza.
Another part of the plan is to license products with novel technology or to cover gaps in the diabetes portfolio in India.
With its price having regained, the Wockhardt scrip is again being monitored by brokerages, including foreign ones such as Credit Suisse and Macquarie. Many, however, are miffed that the company is transparent in good times and clams up in bad. Wockhardt evokes extreme emotions among analysts – they either hate it or love it.
There is a feeling that Wockhartdt is a family show, too individually driven by the Khorakiwalas. “Family members are being groomed for bigger roles; ultimately as a Khorakiwala company you are taking a bet on him,” says an analyst laconically.
Zahabiya disagrees that her father is a micro-manager. “On the contrary, he delegates a lot and doesn’t get involved in day-to-day decisions. He gives you a long rope and free reins that give one an opportunity to learn and grow. But when it comes to strategic matters, he is obviously involved because the buck has to stop somewhere,” she says.
As Habil Khorakiwala contemplates his legacy, he must sooner or later ensure that the transition to the next generation is smooth. His eldest son Huzaifa, executive director of the company, has shown no inclination to take the reins. Instead, he has focused his time and energy on Wockhardt Foundation as its CEO. This raises the possibility of Murtaza getting into the driver’s seat. Their sister Zahabiya, married for five years, seems happy holding the fort at the hospitals venture. Maintaining synchrony among his progeny could well be Habil’s next challenge, whenever that arises. As of now, he shows no sign of letting go.