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Wockhardt Hospitals – Sick Management

February 3, 2008

Wockhardt Hospitals Limited is one of the largest private healthcare companies in India. It has a network of 10 super speciality hospitals and 5 regional speciality intensive care units (ICU) along with 10 pharmacies. However, only 3 of these hospitals contribute to more than 70% of the revenue of the entire company. The Company is planning to add 16 hospitals within a span of two years and is raising capital to fund these expansion plans and repay its loans.

Wockhardt’s total debt to equity ratio stood at 5.2x, as of December 31, 2007, which is extremely high. Though the management plans to utilize part of the proceeds to re-pay its short term debt, but, given its aggressive expansion plans, the Company might have to incur additional debt in the future.

Valuation and Recommendation:
For the 9 months ended FY08, the company reported revenues of Rs 260 crore and a net profit of Rs 7.3 crore.
Fully Diluted Equity Post-IPO: 10.4 crore shares of Rs 10 each = Rs 104 crore
Annualizing Net Profits – Rs 10 crore.
EPS for FY08 = ~ Rs 1.0
Thus the issue is priced between a P/E multiple of 280 and 310 on FY08 earnings.

Do I have to say whether one should apply or not when you have the facts in front of you ? At a time when Bluechips are unloaded without a second thought in secondary market, the management of Wockhardt Hospitals appears to be sick for abnormally pricing the IPO.

Additionally, we recommend value investors not to go by the private placement eye wash unethical managements undertake to fool the retail investors.

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