abbott india, 2q cy 2013

7/27/2019 Abbott India, 2Q CY 2013

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

Y/E Dec (` cr) 2QCY2013 2QCY2012 % chg (yoy) 1QCY2013 % chg (qoq)Net sales 440 412 6.9 420 4.9EBITDA 42 44 (4.6) 46 (7.5)

EBITDA margin (%) 9.6 10.8 (116)bp 10.9 (129)bp

Adjusted PAT 30 30 0.6 32 (6.3)Source: Company, Angel Research

Abbott India (AIL) reported lower-than-expected numbers for 2QCY2013. Its

top-line grew by 6.9% yoy at `440cr, but came lower than our estimate of

`457cr. On account of higher raw material cost, the operating margin for the

quarter contracted by 116bp to 9.6%, 185bp lower than our estimate. Net profitwas flat on a yoy basis at `30cr, 18.0% lower than our estimate.

Top brands to sustain growth; new product introduction to support: AILs mergerwith Solvay Pharma (SPIL) in CY2011, has provided AIL access to new therapeutic

segments and additional brands. Currently, AILs existing portfolio has 10

products among the top 300 brands in the Indian pharmaceutical market, which

are being pushed by ~12,000 odd sales force. Moreover, the company is

planning to enter new therapeutic segments, launch new molecules and expand

the nutritional segment, which is expected to support growth in the long term.

Synergy benefits and cost control measures to aid margin expansion: Variousoperational synergies in manufacturing plants post the amalgamation of AILwith SPIL has resulted in lower raw material cost as a percentage of sales, thus

resulting in better operating margin. In addition, cost saving measures from

various transformation programs and lower promotional spends are expected to

facilitate in sustaining EBITDA margin at higher levels going forward.Outlook and valuation: With a clear strategy of pushing its best brands and focuson nutrition and OTC drug portfolios and continuous new launches, we remain

positive on the growth outlook of AIL. We expect the companys top-line and

profit to grow at a CAGR of 9.9% and 9.3% over CY2012-14E to `1,996 and

`173cr respectively in CY2014E. At current levels, the stock is trading at a PE of

16.7x its CY2014E earnings. We maintain our Buy recommendation on the stockwith a revised target price of `1,628 based on a target PE of 20x for CY2014E.Key financialsY/E December (` cr) CY2011 CY2012 CY2013E CY2014ENet Sales 1,490 1,653 1,788 1,996% chg 50.5 10.9 8.2 11.7

Net Profit 120 145 152 173% chg 97.5 20.2 5.3 13.5

EBITDA margin (%) 11.8 12.2 12.5 12.7

EPS (`) 56.6 68.1 71.7 81.4P/E (x) 50.8 20.0 19.0 16.7

P/BV (x) 5.3 4.5 3.8 3.3

RoE (%) 13.4 24.3 21.7 21.2RoIC (%) 48.2 56.0 56.5 59.2

EV/Sales (x) 1.8 1.6 1.4 1.2

EV/EBITDA (x) 23.3 12.7 11.1 9.4

Source: Company, Angel Research; Note: CMP as on August 14, 2013

BUYCMP `1,360

Target Price `1,628

Investment Period 12 Months

Stock Info

Sector

Net Debt (325)

Bloomberg Code

Shareholding Pattern (%)

Promoters 75.0

MF / Banks / Indian Fls 8.3

FII / NRIs / OCBs 0.3

Indian Public / Others 16.4

Abs. (%) 3m 1yr 3yr

Sensex (2.3) (1.9) 5.9

ABBOTINDIA (4.2) (11.5) 18.7

Beta 0.3

Pharmaceuticals

Market Cap (Rs cr) 2,890

Face Value (Rs) 10

BSE Sensex 19,368

52 Week High / Low 1,650 / 1,306

Avg. Daily Volume 1,664

Nifty 5,742

Reuters Code ABOT.BO

BOOT IN

Tejashwini Kumari022-39357800 Ext: 6856

[email protected]

Abbott IndiaPerformance Highlights

2QCY2013 Result Update | Pharma

August 16, 2013


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August 16, 2013 2

Abbott India | 2QCY2013 Result Update

Exhibit 1:1QCY2013 performanceY/E December (` cr) 2QCY2013 2QCY2012 yoy chg (%) 1QCY2013 qoq chg (%) 1HCY13 1HCY12 % chgNet Sales 440 412 6.9 420 4.9 860 788 9.2Net raw material 263 237 11.1 239 10.1 502 459 9.4(% of Sales) 59.8 57.5 56.9 58.4 58.3

Staff Costs 58 53 9.4 57 1.2 116 103 12.6

(% of Sales) 13.2 12.9 13.7 13.4 13.0

Other Expenses 77 77 (1.1) 77 (1.1) 154 152 1.0

(% of Sales) 17.4 18.8 18.4 17.9 19.3

Total Expenditure 398 367 8.3 374 6.4 772 714 8.1Operating Profit 42 44 (4.6) 46 (7.5) 88 74 19.7EBITDA margin (%) 9.6 10.8 (116)bp 10.9 (129)bp 10.3 9.4 90bp

Interest 0 0 0 0 0

Depreciation 5 4 21.0 5 (8.6) 10 10 1.4

Other Income 6.7 5.7 18.3 6.4 5.5 13 11 19.2

PBT 44 46 (4.0) 47 (5.7) 91 75 12.6(% of Sales) 10.1 11.2 11.2 10.6 9.5

Tax 15 17 (12.2) 15 (4.4) 30 29 4.4

(% of PBT) 33.1 36.1 32.6 32.8 38.3

Reported PAT 30 30 0.6 32 (6.3) 61 46 32.9Extra-ordinary Items - - - - (10)Adjusted PAT 30 30 0.6 32 (6.3) 61 57 8.5PATM (%) 6.7 7.2 7.6 7.1 5.9

Source: Company, Angel Research

Exhibit 2:Actual vs Estimates (1QCY2013)(` cr) Actual Estimate Var (%)Net Sales 440 457 (3.7)EBIDTA 42 53 (19.2)

EBIDTA margin (%) 9.6 11.5 (185)bp

Adjusted PAT 30 36 (18.0)Source: Company, Angel Research

Results disappointed on all frontsFor 2QCY2013, Abbott India reported lower-than-expected results at all fronts.

The company reported a sales growth of 6.9% on a yoy basis to `440cr, which is

3.7% lower than our estimate of `457cr. EBITDA margin contracted by 116bp yoy

and came at 9.6%, 185bp lower than our estimate, primarily due to higher raw

material cost as a percentage of net sales. The tax expense for the quarter was

`14.7cr (33.1% of PBT). Consequently, the net profit was flat on yoy basis at `30cr.

However, the net profit was 18.0% lower than our estimate of `36cr on account of

lower top-line growth and contraction in operating margin.


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August 16, 2013 3


Exhibit 3:Lower-than-expected revenue growth


Exhibit 4:Margin declined with increased RM cost


Investment rationale

Top brands to keep performance upbeat

AIL has been reporting a better performance as compared to the Indian

pharmaceutical market for the past few years. Currently, the company has 10 of its

brands in the top 300 brands - Digene (No1 antacid), Brufen, Thyronorm (8th rank

in IPM list), Duphaston (among the top 50 brands), Vertin (Rank 99 among brands

in IPM), Zolfresh (No. 2 brand in the extended sleep segment) and Heptral. We

believe these top brands would facilitate in better revenue growth going forward.

New product introductions to add value in long runAIL has been continuously launching new products in order to enter new product

categories or garner a higher share in the existing product categories. Abbott India

entered the large PPI (Proton Pump Inhibitors) segment with the launch of Adiza

(Ilaprazole). In addition, the company also launched Omacor in Cardiology

segment, Prothiaden- M in depression segment and Obimet GX Forte in diabetes

segment.

Moreover, the company is planning to enter new therapeutic segments, launch

new molecules and expand the nutritional segment, which is expected to support

growth in the long term. In order to expand its presence in the nutritional segment,

the company has set up a production facility in Jhagadia, Gujarat which isexpected to start commercial production from CY2014E. This unit will make Ensure

and PediaSure range of nutritional drinks.

AIL is currently in the process of completely overhauling its new product launch

processes to double the number of new launches per year. We believe that this will

be a strong revenue driver for the company in the long run.

361

406

399

376

412 4

17 448

420 44

0

57.7 59.5

43.7

53.1

14.2

2.6

12.3 11.66.9

0.0

10.0

20.0

30.0

40.0

50.0

60.0

70.0

0

100

200

300

400

500

2QCY11

3QCY11

4QCY11

1QCY12

2QCY12

3QCY12

4QCY12

1QCY13

2QCY13

(%)

(`cr)

Revenue (LHS) yoy growth (RHS)

7.5

15.6

13.8

7.8

10.8

13.2

16.3

10.99.657.8

56.3

58.6

59.1

57.5

58.2

60.2

56.9

59.8

54.0

55.0

56.0

57.0

58.0

59.0

60.0

61.0

0.0

3.0

6.0

9.0

12.0

15.0

18.0

2QCY11

3QCY11

4QCY11

1QCY12

2QCY12

3QCY12

4QCY12

1QCY13

2QCY13

(%)

(%)

EBITDA margin Net RM as % of net sales (RHS)


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August 16, 2013 4


Cost optimization and operational efficiencies to aid profitability

Post AILs merger with SPIL, Abbott India derived operational synergies by

transferring three brands and eight SKUs to Abbotts own manufacturing plant in

Goa. This has resulted in a decline in raw material cost as a percentage of sales,

thus resulting in better margin. This coupled with cost saving measures from

various transformation programs in the areas of supply chain, technology and

people management along with curtailing promotional spends to 4.3% of net sales

in CY2012 as compared to 5.8% in CY2011; will facilitate in sustaining EBITDA

margin at higher levels which is expected to be at 12.7% for CY2014E.

Strong balance sheet

AIL is a debt-free company with cash reserves of `385cr as of June 30, 2013. We

expect the cash reserve to increase to `488cr by CY2014E. The company enjoys

strong RoE and RoIC of 24.3% and 56.0% respectively (for CY2012) and isexpected to continue reporting them at higher levels at 20.9% and 58.1%

respectively in CY2014E. Due to high cash reserves in the books, we believe there

is a potential that the company may go for delisting.


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August 16, 2013 5


Financials

Exhibit 5:Change in estimatesY/E December Earlier estimates Revised estimates % chgCY2013E CY2014E CY2013E CY2014E CY2013E CY2014ENet sales (` cr) 1,881 2,078 1,788 1,996 (5.0) (3.9)EBITDA margin (%) 12.2 12.3 12.5 12.7 27bp 38bp

EPS (`) 74.2 82.5 71.7 81.4 (3.3) (1.4)

Source: Angel Research

Long term revenue drivers in place

With increasing exposure to existing therapeutic segments and planned entry into

new therapeutic segments with rising new product introductions, we believe the

revenue drivers are in place. Moreover, continued focus on employee spends (from

8.0% as a percentage of sales in CY2007 to 12.5% in CY2012), which forms a

critical part of a pharmaceutical company, would facilitate medium to long term

revenue growth. We expect the revenue to post a 9.9% CAGR over CY2012-14E to

`1,996cr in CY2014E.

Exhibit 6:Revenue growth to rebound in CY2014E


Exhibit 7:Operating margin to improve marginally


EBITDA margin to sustain at higher level

A better product mix post merger has led to a decline in net raw material cost as a

percentage of net sales. Moreover, cost saving measures from various

transformation programs and curtailing promotional expenses has led to reduction

in other expenses. We believe this would lead to sustainable EBITDA margin going

forward. We expect EBITDA margin to improve marginally by 51bp over CY2012-

14E to 12.7% in CY2014E. This would consequently lead to a 9.3% CAGR growth

in adjusted net profit over CY2012-14E to `173cr in CY2014E.

761

990

1,4

90

1,6

53

1,7

88 1

,996

14.3

30.1

50.5

10.98.2

11.7

0

10

20

30

40

50

60

0

400

800

1,200

1,600

2,000

CY2009 CY2010 CY2011 CY2012 CY2013E CY2014E

(%)

(`cr)

Revenue ( LHS) Re venue growth (RHS)

97 69 175 202 223 254

12.8

7.0

11.8

12.2 12.512.7

6

7

8

9

10

11

12

13

14

0

50

100

150

200

250

CY2009 CY2010 CY2011 CY2012E CY2013E CY2014E

(%)(`

cr)

EBITDA (LH S) EBITDA margin ( RHS)


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August 16, 2013 6


Outlook and valuation

With clear strategy of pushing its best brands and focus on nutrition and OTC drug

portfolios and continuous new launches, we remain positive on the growth outlook

for AIL. Post the 2QCY2013 results; we have revised our earnings estimates

slightly. We expect the companys top-line and profit to grow at a CAGR of 9.9%

and 9.3% over CY2012-14E to `1,996 and `173cr respectively in CY2014E. At

current levels, the stock is trading at a PE of 16.7x its CY2014E earnings and P/BV

of 3.3x for CY2014E. We maintain our Buy recommendation on the stock with arevised target price of `1,628 based on a target PE of 20x for CY2014E earnings.Exhibit 8:One-year forward PE band


Key concerns

Shift of focus to unlisted subsidiary

Abbott Laboratories, USA, bought the healthcare solution business from Piramal

Healthcare Ltd. (PHL) for a consideration of US$3.8bn, 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 new drug pricing policy

According to the new drug pricing order, the government will bring prices of 348

essential drugs (all formulations) mentioned in the National List of Essential

Medicines (NLEM) under control against the current practice of controlling prices of

74 bulk drugs and their formulations. The formulations that have more than one

percent market share would be priced only by fixing a Ceiling Price (CP).

Manufacturers would be free to fix any price for their products equal to or belowthe ceiling price. AIL currently has ~40% of its drugs under price control. Hence,

any change in drug pricing policy would impact the companys top-line.

0

400

800

1,200

1,600

2,000

Aug-0

9

Aug-1

0

Aug-1

1

Aug-1

2

Aug-1

3

(`)

Price 10x 15x 20x 25x


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August 16, 2013 7


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

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

strengthened its distribution network to 35 distribution points and ~12,000 sales

force catering to 4,500 stockists and 1,50,000 retailers. AILs employee count

increased from 2,425 in CY2011 to 2,667 in CY2012. The company caters to a

wide range of therapeutic segments like Gastroenterology, Womens health, CNS,

Metabolics, Pain management, Anaesthesia, Neonatology, Vitamins, etc.


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August 16, 2013 8


Profit & Loss Statement

Y/E December (` cr) CY2010 CY2011 CY2012 CY2013E CY2014ETotal operating income 990 1,490 1,653 1,788 1,996% chg 30.1 50.5 10.9 8.2 11.7Net Raw Materials 647 861 972 1,046 1,155

Power & Fuel costs 7 8 9 9 13

Personnel 111 167 206 224 256

Other expenses 155 278 264 286 319

Total Expenditure 920 1,315 1,451 1,565 1,743

EBITDA 69 175 202 223 254% chg (28.6) 152.6 15.0 10.5 13.8

(% of Net Sales) 7.0 11.8 12.2 12.5 12.7

Depreciation& Amortisation 11 15 19 21 24

EBIT 58 160 182 202 230% chg (34.0) 175.6 13.6 11.0 13.7

(% of Net Sales) 5.9 10.8 11.0 11.3 11.5

Interest & other charges 0 0 0 - -

Other Income 36 20 22 25 28

(% of sales) 3.6 1.3 1.3 1.4 1.4

Exceptional Items - - 10.4 - -

PBT 94 180 215 228 258% chg (33.9) 175.8 13.6 11.1 13.7

Tax 33 60 70 75 85

(% of PBT) 35.3 33.2 32.7 33.0 33.0

PAT (reported) 61 120 145 152 173Extraordinary (Exp)/Inc. - - - - -

ADJ. PAT 61 120 145 152 173% chg (21.4) 97.5 20.2 5.3 13.5

(% of Net Sales) 6.2 8.1 8.8 8.5 8.7

Basic EPS (`) 44.6 56.6 68.1 71.7 81.4Fully Diluted EPS ( ) 44.6 56.6 68.1 71.7 81.4% chg (21.4) 27.1 20.2 5.3 13.5


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August 16, 2013 9


Balance Sheet

Y/E December (` cr) CY2010 CY2011 CY2012 CY2013E CY2014ESOURCES OF FUNDSEquity Share Capital 14 21 21 21 21Reserves& Surplus 292 523 626 734 857

Shareholders Funds 305 544 647 755 878Total Loans - - - - -

Deferred Tax Liability (net) 0 (6) 1 1 1

Other Long Term Liabilities - - - - -

Long Term Provisions - 15 29 29 29

Total Liabilities 306 553 678 786 909APPLICATION OF FUNDSGross Block 118 192 204 234 269

Less: Acc. Depreciation 69 112 95 116 139Net Block 50 80 109 119 130Capital Work-in-Progress 1 0 1 1 1

Goodwill

Investments - - - - -

Long term loans and adv. - 25 23 23 23

Current Assets 403 686 775 896 1,036Cash 189 259 325 419 494

Loans & Advances 20 35 43 46 52

Inventory 129 255 264 279 322

Debtors 65 133 141 148 165

Other current assets - 5 3 3 4

Current liabilities 148 239 230 252 281

Net Current Assets 255 448 545 644 755Mis. Exp. not written off - - - - -

Total Assets 306 553 678 786 909


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August 16, 2013 10


Cash Flow Statement

Y/E December (` cr) CY2010 CY2011 CY2012 CY2013E CY2014EProfit before tax 94 180 215 228 258

Depreciation 11 15 19 21 24Change in Working Capital (18) (122) (32) (4) (37)

Direct taxes paid (33) (60) (70) (75) (85)

Others (9) 11 (31) (25) (28)

Cash Flow from Operations 46 24 101 144 132(Inc.)/Dec. in Fixed Assets (12) (73) (12) (31) (35)

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

(Inc.)/Dec. in L.T.Loans & advances - (25) 2 - -

Deposits having maturity more than 3m 10 (32) (65) - -

Others (14) 136 16 25 28

Cash Flow from Investing (16) 6 (59) (6) (7)Issue of Equity - 8 - - -

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

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

Others 10 75 14 0 (6)

Cash Flow from Financing (17) 41 (28) (44) (50.2)Cash acquired on amalgamation - 51 - - -

Inc./(Dec.) in Cash 13 122 14 95 74

Opening Cash balances 176 189 310 325 419Closing Cash balances 189 259 325 419 494


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August 16, 2013 11


Key RatiosY/E December (` cr) CY2010 CY2011 CY2012 CY2013E CY2014EValuation Ratio (x)P/E (on FDEPS) 52.6 50.8 20.0 19.0 16.7P/CEPS 48.4 33.9 17.6 16.7 14.7

P/BV 9.5 5.3 4.5 3.8 3.3

Dividend yield (%) 1.2 1.2 1.2 1.3 1.3

EV/Sales 2.7 1.8 1.6 1.4 1.2

EV/EBITDA 42.6 23.3 12.7 11.1 9.4

EV / Total Assets 8.8 4.8 3.8 3.1 2.6

Per Share Data (`)EPS (Basic) 40.1 26.8 68.1 71.7 81.4

EPS (fully diluted) 40.2 26.8 68.1 71.7 81.4

Cash EPS 48.4 33.9 77.3 81.4 92.5

DPS 17.0 17.0 17.0 18.0 18.0

Book Value 223.3 256.1 304.4 355.3 413.1

Dupont AnalysisEBIT margin 5.3 6.8 11.0 11.3 11.5

Tax retention ratio 0.6 0.5 0.7 0.7 0.7

Asset turnover (x) 3.4 3.3 4.7 4.9 4.8

ROIC (Post-tax) 11.2 11.2 34.8 37.0 37.2

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

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

Operating ROE - - - - -

Returns (%)ROCE (Pre-tax) 18.0 22.9 29.6 27.7 27.2

Angel ROIC (Pre-tax) 48.7 48.2 56.0 56.5 59.2

ROE 19.0 13.4 24.3 21.7 21.2

Turnover ratios (x)Asset Turnover 8.7 9.2 8.4 8.2 7.9

Inventory / Sales (days) 43 49 57 55 55

Receivables (days) 20 25 30 30 30

Payables (days) 52 54 59 59 59

WC (ex-cash) (days) 21 31 45 45 44

Solvency ratios (x)Net debt to equity (0.6) (0.5) (0.5) (0.6) (0.6)

Net debt to EBITDA (3.0) (2.3) (1.6) (1.9) (1.9)

Interest Coverage 1,302.6 3,256.6 - - -


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August 16 2013 12


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

DISCLAIMERThis document is solely for the personal information of the recipient, and must not be singularly used as the basis of any investmentdecision. Nothing in this document should be construed as investment or financial advice. Each recipient of this document shouldmake such investigations as they deem necessary to arrive at an independent evaluation of an investment in the securities of thecompanies referred to in this document (including the merits and risks involved), and should consult their own advisors to determinethe merits and risks of such an investment.

Angel Broking Pvt. Limited, its affiliates, directors, its proprietary trading and investment businesses may, from time to time, makeinvestment decisions that are inconsistent with or contradictory to the recommendations expressed herein. The views contained in thisdocument are those of the analyst, and the company may or may not subscribe to all the views expressed within.

Reports based on technical and derivative analysis center on studying charts of a stock's price movement, outstanding positions andtrading volume, as opposed to focusing on a company's fundamentals and, as such, may not match with a report on a company'sfundamentals.

The information in this document has been printed on the basis of publicly available information, internal data and other reliablesources believed to be true, but we do not represent that it is accurate or complete and it should not be relied on as such, as thisdocument is for general guidance only. Angel Broking Pvt. Limited or any of its affiliates/ group companies shall not be in any wayresponsible for any loss or damage that may arise to any person from any inadvertent error in the information contained in this report.Angel Broking Pvt. Limited has not independently verified all the information contained within this document. Accordingly, we cannottestify, nor make any representation or warranty, express or implied, to the accuracy, contents or data contained within this document.While Angel Broking Pvt. Limited endeavours to update on a reasonable basis the information discussed in this material, there may beregulatory, compliance, or other reasons that prevent us from doing so.

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Note: Please refer to the important `Stock Holding Disclosure' report on the Angel website (Research Section). Also, please refer to thelatest update on respective stocks for the disclosure status in respect of those stocks. Angel Broking Pvt. Limited and its affiliates mayhave investment positions in the stocks recommended in this report.

Disclosure of Interest Statement Abbott India

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

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

Note: We have not considered any Exposure below `1 lakh for Angel, its Group companies and Directors

abbott india, 2q cy 2013

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