Wockhardt Waluj UK import alert – no sales hit: Macquarie Research,

Event
 WPL said that it has received an import alert from the UK MHRA for its
manufacturing plant at Waluj. This means all products from this facility (both
the oral and injectable block) will be blocked from entry into the UK market
until the manufacturing issues are resolved.This is the same facility that was
hit by a US import alert in May-2013.
 Sales to the UK market from the Waluj plant in FY13 were around ~UK£6-
8m. Given the products are already available to be shipped from alternative
sites (which are UK MHRA compliant), WPL expects this UK MHRA import
alert on Waluj to have a negligible impact on its financials.
 We maintain our OP rating but cut our TP to Rs1,440 (from Rs1,680) as we
expect news-flow to weigh on valuation multiples in the near-term until the
regulatory issues at Waluj are resolved. We see near-term volatility existing
on the stock due to this import alert.
Impact
 Early resolution of US import alert critical: Before this UK MHRA import
alert, in May-13 the US FDA had put an import alert on the same Waluj
facility. WPL was guiding to the potential loss of US$100m in annual sales
(v/s our estimate of US$135m) due to the US import alert at the facility. Half of
the pending 46 ANDAs with the US FDA are from the Waluj facility (of which
12 were filed recently & hence near-term approval was not anticipated).
 Remedial measures being pursued by WPL (site transfer of high-value
products or segregating compliant Oral block into a separate facility), if
successful, could provide upside risk. We think the speed with which WPL can
resolve these regulatory issues is going to be critical (unlikely in FY14).
Earnings and target price revision
 No change to our earnings estimate as WPL has approvals to ship products
from alternative sites. However, we expect the news-flow to weigh on
valuation multiples near-term given the regulatory uncertainty and hence cut
our TP to Rs1,440 @12x FY14E P/E (v/s Rs1,680 @14x FY14E P/E).
Price catalyst
 12-month price target: Rs1,440.00 based on a PER methodology.
 Catalyst: Resolution of regulatory issues, niche launches
Action and recommendation
 We do acknowledge that the regulatory action is a negative surprise causing
near-term pressure. However, valuations are attractive, with WPL trading at
~7.5x FY14E PER, despite industry high return ratios (ROE and ROIC of
>40%), a strengthened balance sheet (D/E<.5x) and strong FCF generation
>US$150m in FY14. Maintain Outperform.

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