abbott 2qcy2012ru

7/31/2019 Abbott 2qcy2012ru

1/13

Please refer to important disclosures at the end of this report 1

EBITDA 44 26 70.6 29 51.6

EBITDA margin (%) 10.8 7.3 353bp 7.8 300bp

Source: Company, Angel Research

For 2QCY2012, Abbott India Ltd (AIL) reported a top-line of `412cr, in line with

our estimate of `410cr and 14.9% higher yoy from `358cr in 2QCY2011. The

EBITDA margin expanded by 353bp yoy to 10.8% during 2QCY2012 on accountof decline in overall expenses. Consequently, the net profit surged by 72.6% yoy

to `30cr in 2QCY2012 from `17cr in 2QCY2011.

AILs merger with Solvay Pharma (SPIL) in CY2011, has provided AIL a

widened product portfolio, thus giving it access to untapped therapeutic segments.

In addition, the companys continuing focus on advertisement and employee cost,

which witnessed a CAGR of 45.7% and 34.7%, respectively, over CY2006-11, is

expected to aid in revenue growth going forward.

We expect AIL to post a 12.6% CAGR in revenue to

`1,833cr over CY2011-13E. The EBITDA margin is expected to expand by 183bp

from 10.0% in CY2011 to 11.8% in CY2013E resulting from reduced expenses on

account of the complementary nature of businesses of the two entities getting

merged (AIL and SPIL). Hence, we expect the companys net profit to witness a

12.5% CAGR over CY2011-13E to `152cr. At the current market price, the stock

is trading at a PE of 21.4x its CY2013E earnings and EV/sales of 1.5x for

CY2013E. Considering the high valuation,

Key financials

% chg 30.1 46.0 10.8 14.4

% chg (21.4) 97.2 (3.5) 31.2

EBITDA margin (%) 7.0 10.0 10.4 11.8

P/E (x) 53.5 27.1 28.1 21.4

P/BV (x) 10.7 6.0 5.3 4.5

RoE (%) 21.2 28.3 20.0 22.7

RoIC (%) 54.4 63.7 52.1 69.5EV/Sales (x) 3.1 2.1 1.8 1.5

EV/EBITDA (x) 44.3 20.9 17.4 13.0


CMP `1,536

Target Price -

Investment Period 12 Months

Stock Info

Sector

Net Debt (261)

Bloomberg Code

Shareholding Pattern (%)

Promoters 75.0

MF / Banks / Indian Fls 5.8

FII / NRIs / OCBs 2.0

Indian Public / Others 17.2

Abs. (%) 3m 1yr 3yr

Sensex 6.9 2.5 17.0

ABBOTINDIA 1.3 6.1 204.9

Beta 0.4

Pharmaceuticals

Market Cap (Rs cr) 3,264

52 Week High / Low 1,375 / 1,807

Avg. Daily Volume 1,448

Face Value (Rs) 10

BSE Sensex 17,558

Nifty 5,320

Reuters Code ABOT.BO

BOOT IN

+91- 22- 3935 7800 Ext: 6849

[email protected]

Performance Highlights

2QCY2012 Result Update | Pharma

August 10, 2012


2/13

Abbott India | 2QCY2012 Result Update

August 10, 2012 2

Exhibit 1:2QCY2012 performance

Net raw material 237 206 14.7 222 6.6 474 361 31.2(% of Sales) 57.5 57.6 59.1 60.1 60.1

Staff Costs 53 44 21.1 49 7.4 103 73 41.2

(% of Sales) 12.9 12.2 13.1 13.0 12.1

Other Expenses 77 82 (5.7) 75 3.3 152 132 15.3

(% of Sales) 18.8 22.9 19.9 19.3 22.0

EBITDA margin (%) 10.8 7.3 353bp 7.8 300bp 7.5 5.8 173bp

Interest 0 0 0 0 0

Depreciation 4 3 23.1 6 (33.3) 10 6 71.4

Other Income 5.7 5.3 7.0 5.3 7.2 11 8 30.9

(% of Sales) 11.2 7.9 7.6 7.7 6.2

Tax 17 11 50.7 12 38.7 29 14 100.1

(% of PBT) 36.1 39.3 41.9 47.6 38.4

PATM - - (10) (10)

Equity capital (cr)

7.2 4.8 4.4 4.0 3.8


Exhibit 2:Actual vs. estimates (2QCY2012)Total Income 412 410 0.4

EBIDTA 44 39 13.1

EBIDTA margin (%) 10.8 9.6 122bp

Adjusted PAT 30 32 (7.3)


Operating costs decline post amalgamation- EBITDA margin expands

For 2QCY2012, AIL reported a revenue at `412cr, in line with our estimate of

`410cr and 14.9% higher on a yoy basis. The operating cost witnessed a decline

during the quarter which led to an expansion in the EBITDA margin by 353bp yoy

to 10.8% from 7.3% in 2QCY2011. However, the net profit came in at `30cr in

2QCY2012, 7.3% lower than our estimate of `32cr on account of lower than

expected other income.


3/13


August 10, 2012 3

Investment rationale

Synergies with SPIL to improve the business model

Product portfolio to expand, giving access to newer segments

AIL is present across different segments such as pain management,

gastroenterology, metabolic, urology, thyroid, diabetes, neurology, anesthesiology

and neonatology. The company has some of the leading pharmaceutical brands

such as Digene, Cremaffin, Brufen, Thyronorm, Zolfresh and Pediasure, which are

the main revenue drivers. Post the merger with SPIL, AILs product portfolio has

widened, providing it leadership position in different therapeutic segments

AIL had a gastroenterology portfolio comprising Digene, Cremaffin and Ganaton.

Digene is the market leader in the antacid segment with a 35% market share,

while Cremaffin is a leader in the laxative segment. With the addition of Duphalac,

Creon and Udiliv through the merger of SPIL, the company gained leadership in

the gastroenterology segment in India.

In addition, the company got access to the womens health segment post-merger

with products such as Duphaston, Duvadilan, Pro-9, Life and B-crip. Duphaston was

a major contributor (23%) to the total revenue of SPIL in CY2010. Moreover, AILs

CNS portfolio strengthened with the addition of SPILs Vertin, a market leader in

the vertigo segment in India. Thus, synergy between the two companies is expected

to help AILs growth in the long term.

Contribution margin to witness an uptrend

The companys net raw-material cost as a percent of sales has started witnessing a

downtrend to ~58% levels since 2QCY2011. Earlier it was at more than 60%

levels. We expect the raw material cost (as a percentage of sales) to stabilize in the

higher 50s on account of a change in the business mix for the combined entity.

This is expected to result in expansion of contribution margin by 183bp from

10.0% in CY2011 to 11.8% in CY2013E.

Exhibit 3:Raw material cost declining post merger

Source: Company, Angel Research (post 2QCY2011 numbers include

consolidated results for AIL and SPIL)

Exhibit 4:Raw material cost shrink on new product mix

Source: Company, Angel Research (*CY2011-13E are consolidated results

for AIL and SPIL)

147

157

168

155

206

229

227

222

237

64.3

61.760.4

63.8

57.6

55.7

58.7 59.1

57.5

51

54

57

60

63

66

0

50

100

150

200

250

2QCY10

3QCY10

4QCY10

1QCY11

2QCY11

3QCY11

4QCY11

1QCY12

2QCY12

(%)

(`cr)

Net raw material (LHS) % of ne t sales (RHS)

455

504

647

848

913

1,0

34

68.3

66.365.4

58.7

57.056.4

50

54

58

62

66

70

0

200

400

600

800

1,000

1,200

CY2008 CY2009 CY2010 CY2011 CY2012E CY2013E

(%)

(`cr)

Net raw material cost (LHS) % of net sales (RHS)


4/13


August 10, 2012 4

Strong balance sheet

AIL is a debt-free company with cash reserves of `189cr as of December 2010,

and RoE and RoIC of 21.2% and 65.6% respectively for CY2010. Post

amalgamation, cash on AIL books stands at `259cr for CY2011 (SPIL had cash of

`51cr for CY2010). We expect the cash to increase to `447cr by CY2013E end,

while RoE and RoIC are expected at 22.7% and 69.5% respectively for CY2013E.

Due to high cash reserves in the books, we believe there is potential for the

company to get delisted.


5/13


August 10, 2012 5

Financials

Exhibit 5:Change in estimates

EBITDA margin (%) 9.7 11.9 10.4 11.8 78bp (16)bp

Source: Angel Research

Advertisement & employee spend to drive revenue

Advertisement spend (as a percentage of sales) increased from 2.6% in CY2006 to

6.1% in CY2011, while employee expenses (as a percentage of net sales)

increased from 7.4% in CY2006 to 11.6% in CY2011. We expect the company tomaintain its focus on these expenses which form a critical part of the

pharmaceutical industry, thus facilitating medium to long term revenue growth.

Hence, we expect the revenue to post a 12.6% CAGR over CY2011-13E.

Exhibit 4: Continued focus on advertisement and employee spend to drive revenue growth


Exhibit 6:Revenue growth to normalize on a higher base of CY2011

Source: Company, Angel Research (*CY2011-13E are consolidated results for AIL and SPIL)

13.44 14 20 24 49 88

-

-

2.6

2.4

3.1 3.1

5.1

6.1

0

1

2

3

4

5

6

7

0

20

40

60

80

100

CY2006 CY2007 CY2008 CY2009 CY2010 CY2011

(%)

(`cr)

Advertisement cost (LHS) % of net sales (RHS)

SPIL

38 47 63 78 111 168

7.48.0

9.5

10.3

10.9

11.6

6

7

8

9

10

11

12

0

20

40

6080

100

120

140

160

180

CY2006 CY2007 CY2008 CY2009 CY2010 CY2011

(%)

(`cr)

Employee expense (LHS) % of ne t sales (RHS)

SPIL

666

761

990

1,4

46

1,6

02

1,8

33

12.0 14.3

30.1

46.0

10.8 14.4

0

10

20

30

40

50

0

400

800

1,200

1,600

2,000

CY2008 CY2009 CY2010 CY2011 CY2012E CY2013E

(%)

(`cr)

Revenue (LHS) Revenue growth (RHS)


6/13


August 10, 2012 6

Blended EBITDA margin to witness expansion

The average EBITDA margin for SPIL was at ~24% for the past five years, while

that of AIL has been at ~11% for the same period. The consolidation of the two

businesses is expected to result in operational efficiencies thus leading to a gradual

expansion in the EBITDA margin. We expect the EBITDA margin to expand by

183bp over CY2011-13E to 11.8% in CY2013E.

Exhibit 5: Higher blended EBITDA margin vs AILs margins

Source: Company, Angel Research (*CY2011E-13E are consolidated results for AIL and SPIL)

Improved business model to augment profit growth

The amalgamation of AIL and SPIL is expected to lead to economies of scale owing

to the complementary nature of drugs, resulting in an expansion of EBITDA

margin, which consequently will result in better profit. Hence, we expect the

companys net profit to post a CAGR of 12.5% over CY2011-13E, from `120cr in

CY2011 to `152cr in CY2013E.

Exhibit 7: Profit margin to recover in CY2013E

Source: Company, Angel Research (*CY2011E-13E are consolidated results for AIL and SPIL)

76 97 69 144 167 216

14.1 15.7

11.110.0 10.4

11.8

4

8

12

16

20

24

28

0

40

80

120

160

200

CY2008 CY2009 CY2010 CY2011 CY2012E CY2013E

(%)

(`

cr)

EBITDA (LHS) Blended margin AIL's margin SPILs margin

61 78 61 120 116 152

9.1

10.2

6.2

8.3

7.3

8.3

5

6

7

8

9

10

11

0

30

60

90

120

150

180

CY2008 CY2009 CY2010 CY2011 CY2012E CY2013E

(%)

(`cr)

PAT (LHS) PAT margin (RHS)


7/13


August 10, 2012 7

Exhibit 7:Relative valuation

Glaxo 2,396 27.3 632 74.6 30.3 28.2 8.8 6.6 24.2

Aventis 1,264 15.1 172 74.5 14.5 29.6 4.6 3.8 25.4

Pfizer 1,095 18.0 185 62.0 14.2 20.0 2.8 2.6 14.4

Novartis 861 14.6 141 44.2 18.6 15.4 2.6 2.5 17.2

Wyeth 609 28.1 141 62.1 30.1 14.7 4.0 2.9 10.3

Astrazeneca 485 (2.9) 20 7.9 10.3 205.4 21.5 7.6 (257.9)

Source: Company (all above figures are on a TTM basis)

Outlook and valuation

We have revised our revenue and earnings estimates downwards for CY2012E

and CY2013E, since the new business model post consolidation would take some

time to get streamlined. At current levels, the stock is trading at a PE of 21.4x its

CY2013E earnings and P/BV of 4.5x for CY2013E.

Exhibit 8: One-year forward PE band


Exhibit 9: One-year forward EV/Sales band


0

400

800

1,200

1,600

2,000

Aug-07 Aug-08 Aug-09 Aug-10 Aug-11 Aug-12

(`)

Price 8x 12x 16x 20x

0

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

Aug-07 Aug-08 Aug-09 Aug-10 Aug-11 Aug-12

EV

(`

cr)

EV 1.6x 1.2x 0.8x 0.4x


8/13


August 10, 2012 8

Key concerns

Shift of focus to the unlisted subsidiary

Abbott Laboratories, USA, bought the healthcare solution business from PiramalHealthcare Ltd (PHL) for a consideration of US$3.8bn in 2010, which was

transferred to the unlisted subsidiary, Abbott Healthcare Pvt Ltd (AHPL). The

transfer included manufacturing facilities at Baddi, Himachal Pradesh; rights to

approximately 350 brands and trademarks; and ~5,000 employees relating to its

domestic formulations business. Since the unlisted subsidiary is 100% owned with

extended portfolio from Piramals healthcare business, there is a possibility that the

parent company shifts its focus to the unlisted entity. Also, the merger would limit

listed AILs access to untapped therapeutic segments where PHL already exists.

Impact of the new drug pricing policyThe New Pharmaceutical Pricing Policy (NPPP) draft note released by Department

of Pharmaceutical in 2011 is set to replace the Drug Policy of 1994. This new

policy is based on the revised National List of Essential Medicines (NLEM) released

in 2011, which includes 348 drugs instead of 74 drugs previously. Principles of the

policy are based on three basic factors: 1) essentiality of drugs, 2) market-based

pricing (MBP) and 3) control of formulation prices only. AIL currently has ~40% of

its drugs under price control. If this number increases it could hinder the

profitability of the company.

Company Background

AIL is a 50.44% subsidiary of Abbott Capital India Ltd, UK, which is a subsidiary of

Abbott Laboratories, USA. In CY2011, the company merged with Solvay Pharma,

which was acquired by the parent company in CY2010. Post merger, AIL

strengthened its distribution network to 35 distribution points (from 18), and caters

to 4,500 stockists and 1,50,000 retailers. AILs employee count increased from

1,747 in CY2010 to 2,425 in CY2011. The company caters to a wide range of

therapeutic segments like gastroenterology, womens health, CNS, metabolics,

pain management, anesthesia, neonatology, vitamins, etc.


9/13


August 10, 2012 9

Profit & Loss Statement

767 996 1,464 1,623 1,857

Less: Excise duty 6 6 18 21 23Net Sales 761 990 1,446 1,602 1,833

% chg 14.3 30.1 46.0 10.8 14.4

Net Raw Materials 504 647 848 913 1,034

Power & Fuel costs 5 7 8 10 12

Personnel 62 111 167 203 220

Other expenses 92 155 278 308 352

Total Expenditure 664 920 1,302 1,435 1,617

% chg 28.7 (28.6) 107.3 16.2 29.1

(% of Net Sales) 12.8 7.0 10.0 10.4 11.8

Depreciation 9 11 15 18 20

% chg 28.6 (34.1) 121.5 15.9 31.4

(% of Net Sales) 11.6 5.9 8.9 9.3 10.7

Interest & other charges 0 0 0 - -

Other Income 29 36 51 24 31

(% of sales) 3.8 3.6 3.5 1.5 1.7

% chg 28.4 (34.0) 121.6 15.9 31.4

Tax 40 33 60 57 75

(% of PBT) 34.0 35.3 33.2 33.0 33.0

Extraordinary (Exp)/Inc. (0) (0) - - -

% chg 28.3 (21.4) 97.2 (3.5) 31.2

(% of Net Sales) 10.2 6.2 8.3 7.3 8.3

% chg 28.3 (21.4) 26.9 (3.5) 31.2


10/13


August 10, 2012 10

Balance Sheet

Equity Share Capital 14 14 21 21 21Reserves& Surplus 258 292 523 595 703

Total Loans - - - - -

Deferred Tax Liability (Net) 2 0 (6) (6) (6)

Other Long Term Liabilities - - - - -

Long Term Provisions - - 11 11 11

Gross Block 107 118 192 211 232

Less: Acc. Depreciation 58 69 112 130 150

Capital Work-in-Progress 0 1 1 1 1

Goodwill - - - - -

Investments - - - - -

Long term Loans & adv - - 31 31 31

Cash 176 189 259 348 447

Loans & Advances 17 20 27 30 34

Inventory 102 129 255 212 206

Debtors 44 65 133 110 126

Other current assets - - 5 5 6

Current liabilities 114 148 241 197 204

Mis. Exp. not written off - - - - -


11/13


August 10, 2012 11

Cash Flow Statement

Profit before tax 117 94 180 173 227

Depreciation 9 11 15 18 20Change in Working Capital (37) (18) (112) 18 (7)

Other income (29) (36) (51) (24) (31)

Direct taxes paid (40) (33) (60) (57) (75)

Others 17 27 52 - -

(Inc.)/Dec. in Fixed Assets (6) (12) (74) (19) (21)

(Inc.)/Dec. in Investments - - - - -

(Inc.)/Dec. in L.T. Loans & adv - - (31) - -

Deposit having maturity more than 3m - 10 32 - -

Other income 29 36 51 24 31

Others (25) (40) 59 - -

Issue of Equity - - 8 - -

Inc./(Dec.) in loans (1) - - - -

Dividend Paid (Incl. Tax) (27) (27) (42) (44) (44)

Others 5 (0) (8) - -

Cash acquired on amalgamation - - 51 - -

Inc./(Dec.) in Cash 12 13 70 89 99


12/13


August 10, 2012 12

Key Ratios

P/E (on FDEPS) 42.0 53.5 27.1 28.1 21.4P/CEPS 63.4 52.9 63.7 24.3 19.0

P/BV 12.0 10.7 6.0 5.3 4.5

Dividend yield (%) 1.1 1.1 1.1 1.2 1.2

EV/Sales 4.1 3.1 2.1 1.8 1.5

EV/EBITDA 31.7 44.3 20.9 17.4 13.0

EV / Total Assets 11.3 10.1 5.5 4.7 3.9

EPS (Basic) 56.7 44.6 56.7 54.7 71.7

EPS (fully diluted) 56.8 44.6 56.6 54.7 71.7

Cash EPS 63.4 52.9 63.7 63.1 81.0

DPS 17.0 17.0 17.0 18.0 18.0

Book Value 198.6 223.3 256.1 289.9 340.8

EBIT margin 11.6 5.9 8.9 9.3 10.7

Tax retention ratio 0.7 0.6 0.7 0.7 0.7

Asset turnover (x) 9.7 9.3 7.1 5.9 6.5

ROIC (Post-tax) 74.1 35.2 42.5 36.8 46.9

Cost of Debt (Post Tax) 34.8 - - - -

Leverage (x) (0.7) (0.6) (0.5) (0.5) (0.6)

Operating ROE 172.2 - - - -

ROCE (Pre-tax) 35.4 20.1 30.2 25.5 29.1

Angel ROIC (Pre-tax) 112.2 54.4 63.7 52.1 69.5

ROE 31.5 21.2 28.3 20.0 22.7

Asset Turnover 7.4 8.8 9.3 8.0 8.3

Inventory / Sales (days) 47 43 48 53 42

Receivables (days) 18 20 25 25 25

Payables (days) 66 52 54 50 46

WC (ex-cash) (days) 15 21 31 39 33

Net debt to equity (0.6) (0.6) (0.5) (0.6) (0.6)

Net debt to EBITDA (1.8) (2.7) (1.8) (2.1) (2.1)

Interest Coverage 441.5 1,455.1 4,297.9 - -


13/13


A t 10 2012 13

Research Team Tel: 022 - 39357800 E-mail: [email protected] Website: www.angelbroking.com

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Disclosure of Interest Statement Abbott India Ltd.

1. Analyst ownership of the stock No

2. Angel and its Group companies ownership of the stock No

3. Angel and its Group companies' Directors ownership of the stock No

4. Broking relationship with company covered No

Buy (> 15%) Accumulate (5% to 15%) Neutral (-5 to 5%)Reduce (-5% to 15%) Sell (< -15%)

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abbott 2qcy2012ru

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