Wanbury Ltd. – A Turnaround Specialist Turning Itself Around

The company I am going to discuss today has contingent liabilities close to its last FY’s revenues, has been making losses for last so many years, did an international acquisition that went horribly wrong, so this is a company only for very high risk takers and therefore…. others should come back to this blog some other day 🙂   .

If you are still reading this blog post, you are most likely having a very high risk appetite and this is a pre-requisite for a stock like this. As growing up I realized that even garbage has value and this stock is way better than garbage, and we could be catching the company- ripe for a blowout, right at its bottom.

Wanbury Ltd. (http://www.wanbury.com/index.html) came into existence with the merger of two diverse companies, Wander and Pearl Organics. It was one of the country’s fastest growing pharmaceutical companies, and has a strong presence in domestic formulations, API, CRAMS and overseas generics. It is the largest manufacturer of Metformin (around 30% of world production is manufactured by wanbury), Tramadol and Salsalate for the US markets. Wanbury has manufacturing plants at Patalganga, Turbhe, Tarapur and Mazgaon in Maharashtra and at Tanaku in Andhra Pradesh. It has two US FDA‐approved multi‐product API facilities and other plants under operation for five semi‐regulated markets. Its customer base includes Cipla, Ranbaxy and Sun Pharma among domestic companies and Teva, Mylan, etc, among foreign companies.

Background: The Company was doing very well and was creating value by taking over stressed assets and turning them around, until it made a catastrophe mistake of buying a Spanish company Cantabria, which proved a very costly asset bought at a very wrong time. The asset was bought completely in 2007, just before the 2008 crisis and unfortunately, what was expected to be the most prized asset, turned out to be its near-death warrant. Wanbury’s timing went horribly wrong, as after 2008 crisis the Spanish economy could never recover and went into deep financial crisis and depression and on a horribly wrong trajectory of unemployment graph (currently around 27% if I am not wrong). In April 2007, the company had issued FCCB aggregating Euro 15 million in order to fund the Cantabaria acquisition, organic expansion, related diversifications and new R&D activities (800 Nos. 1% Unsecured Foreign Currency Convertible A Bonds (“A Bonds”) and 700 Nos. 1% Unsecured Foreign Currency Convertible B Bonds (“B Bonds”) of face value of 10,000 each maturing on 23 April 2012 and 17 December 2012 respectively). Till cantabaria acquisition Wanbuy was a known turnaround and integration specialist (with their successful turnaround and integration of DOCL and wander). The cantabaria entity cost wanbury really bad. With Spanish economy and business going down day by day, eventually after years of struggle, wanbury finally decided to wind down Cantabria last year. The effect of this acquisition and bad economy even forced Wanbuy into CDR a few years back. By the way most of the contingent liabilities arose as a consequence of Cantabaria and its acquisition, most of which is now taken care of.

Past Horrible, Future very exiting: The last couple of years have been really eventful: with new operations management coming in place and on back of CDR package getting approved, the turnaround specialist started turning around itself. Since the new presidents (API and Formulations) took over, the company has remarkably started resurrecting itself. The loses started shrinking and slowly it became EBITA positive and now positive even at the Net level. The products of the company were never a problem and the company’s product brands are well known. The Company continues to focus on Orthopedics, Gastrointestinal, Gynecology and Surgery therapeutic segments. Its brands like Cpink, Adtrol Plus, Rabiplus, Folinine are among Top 10 brands (some even in top 5) in their respective segments. Another product Myotol-f has been rated as the best brand launch of the year and is ranked as No. 1 in its segment by per ORG-IMS. One of the reasons of this turnaround was also price increases of its various brands last year (without affecting the sales), so the company has pricing power too. The company has two US FDA approved plants and other plants for unregulated markets. The company’s formulations and API business both are looking up and showing good growth in last couple of years. As far as FCCB’s are concerned, Most of them are converted to term loans, 128 “A” bonds were converted to 5,29,085 fully paid equity shares at a conversion price of rs 138. Balance of 48 A bonds are pending negotiation. The company is expected to be net positive this year (FY ending Mar 15- internally company still prefers to track Mar ending FYs rather than Sep ending FY which it is forced to follow this year.) and from next year it should start churning good amount of profits. Company is already generating positive cash flow. Company has shown net profits, inspite of servicing their entire debt’s interest and principal and is also paying taxes. This is significant because company had moratorium for repayments till oct 12, and now since they are generating profits inspite of servicing their entire debt (which is very significant at around 310cr), it means the recovery is for real and sustainable and they have shown EBITA profits un-interrupted for last 5 quarters and this quarter profits even at net level. The recipe for success looks right this time around. The company has great block buster brands, has pricing power, increasing promoter holding, already started generating profits while servicing its entire debt, has two US FDA approved plants, and also started generating positive cash flows.

Valuation: This turnaround gem with sales of 400+ cr is trading at a market cap of just 85cr. The company has close to 17cr in cash and owns land worth 48cr and most importantly own two US FDA approved plants (which are its most prized asset). The promoters have upped their stake from 42% to around 49% (with 8% pledge) by way of warrants issued at 37.5 rs. With other pharma companies being valued at 5-12 times their sales, this turnaround gem has been away from the radar of investors and is therefore, available dirt cheap at just 0.2 times the sales (yes you are right the valuation gap is too big to be true, 0.2 times VS 5-12 times). As the company keeps churning profits this gap will slowly but surely get filled and thus could give massive returns in the years to come. The company with its great brands and assets would either grow to become very big or be taken over by some other aspiring company. Remember Ranbaxy which was taken over on good valuations despite its US FDA issues and massive debt, on the other hand this company for its size has wonderful brands and no US FDA issues (food for thought).

Technicals: The Company has broken out after a consolidation of close to 4.5 yrs and is looking extremely strong with hardly any downside. Even after the stock market carnage of last few days, the stock remains unaffected and is consolidating very well, especially with very low volumes on down days.

Note: Researching this company has taken a lot of time for me personally because it had a great history that went awfully wrong and I had to be sure that this time the recovery is real and more importantly sustainable. I had this company on radar for quite a few quarters now and have interacted with management multiple times to be sure about the prospects. I believe personally the company is on the right path to become an attention grabber and could be the story of next 3 years. One should not dismiss such company by just one bad quarter and should look at the bigger picture always. For example, mar quarter was an aberration where its EBITA was flat (that was mainly because formulations division had an abnormally bad March “month” ) but then it bounced back strongly in the next quarter to not only give a strong EBITA performance but also gave profits at net level. Remember it’s hard to go wrong in a company that has great brands with good pricing power.