Story of expense (mis)management

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Servicing high debt, mysterious expenses pull down financials; a reversal helps it rebound

Wockhardt’s rebound story, when expressed in numbers, is intricately linked with not just a rise in revenues, which incidentally was nowhere close to being outstanding in nature, but with a very sharp decline in what the company just termed it as miscellaneous operating expenses.

In an analysis of the consolidated financials of the company in the past five financial years and the first-half of the current financial year, Financial Chronicle Research Bureau studies at the numbers behind the turnaround story of Wockhardt.

Except for FY11, the pharma company’s net sales have not seen a degrowth in the past decade. However, its financials got hit the most in the 2007-09 period which witnessed an extraordinary rise in expenses — both operating and interest cost-based ones — which it had to incur to ensure continuous growth.

Only when this element subsided in FY12 and also in the first half of FY13, the profit growth began showing a turnaround. This was, no doubt, aided by the substantial net growth in sales, which had turned negative in FY11, but was back in the positive territory in FY12.

Wockhardt followed the calendar year as its financial year till 2008. In 2009, it changed this to the April-March period, resulting in a 15-month-long financial year that ended in March 2010.

The first signs of trouble were noticeable in CY08 when Wockhardt’s annual net sales growth of 35 per cent to Rs 3,590 crore was eclipsed by a huge 7.5 times annual jump of its miscellaneous operating expenses to Rs 888 crore, and a 30 per cent rise in other non-miscellaneous expenses to Rs 2,662 crore.

It was also the year when the company’s total debt rose by 47 per cent to Rs 4,235 crore. Because of this, the interest cost rose to Rs 260 crore in that year from Rs 165 crore a year ago. As a result of this, CY08 was also the first year in a long time when Wockhardt reported a net loss of Rs 160 crore.

It was the emergence of miscellaneous operating expenses and higher borrowings, which made Wockhardt’s financials, buckle under. The company, in its annual reports, never disclosed what the miscellaneous expenses comprised of and why they shot up so much.

The company’s miscellaneous operating expenses doubled to Rs 1,777 crore in the 15-month year-ended March 2010, and interest cost rose sharply to Rs 342 crore. The company’s net loss soared to Rs 1,000 crore. Clearly, the company was in a financial crisis.

The interesting part was that net profit bounced back in the positive territory at Rs 90 crore in FY11, aided not by a rise in net sales which actually suffered and fell by Rs 750 crore to Rs 3,750 crore, but by a Rs 970 crore fall in the mysterious miscellaneous expenses to Rs 807 crore. Other non-miscellaneous expenses, including raw materials cost, also fell by 25 per cent to Rs 2,550 crore. Helped by a reduction in total debt, FY11 also saw a fall in the interest cost.

Net sales bounced back in FY12 to Rs 4,610 crore, higher than the previous all-time high of Rs 4,500 in 15-month year that ended in March 2010.

Even though the regular non-miscellaneous expenses went up by 18 per cent to Rs 3,013 crore, the miscellaneous operating expenses remained unchanged at Rs 817 crore. Net profit, as a result, went up to Rs 342 crore, not an all-time high, but close enough.

But the real evidence of a turnaround in Wockhardt’s financials is seen in the first half of the current FY13 when its net sales zoomed to Rs 4,614 crore and operating profit crossed the Rs 1,000 crore mark. The net profit at Rs 832 crore in just six months of FY13 is more than double the full-year net sales of FY12.

Quarterly results do not give a break-up of the total expenditure. Therefore, the next six months remain crucial to see whether the miscellaneous expense account hits back with force when the company declares its full FY13 figures.



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