Abbott India 1Q CY 2013

1QCY2013 Result Update | Pharma
May 2, 2013
Abbott India
Performance Highlights
Y/E Dec (` cr) Net sales EBITDA EBITDA margin (%) Adjusted PAT 1QCY2013 420 46 10.9 32 1QCY2012 376 29 7.8 27 % chg (yoy) 4QCY2012 11.6 56.4 313bp 17.1 448 73 16.3 50 % chg (qoq) (6.3) (37.0) (531)bp (36.3)
BUY
CMP Target Price
Investment Period
Stock Info Sector Market Cap (` cr) Net Debt (` cr) Beta 52 Week High / Low Avg. Daily Volume Face Value (Rs) BSE Sensex Nifty Reuters Code Bloomberg Code Pharmaceuticals 3,029 (261) 0.5 1656/1306 1,625 10 19,736 5,999 ABOT.BO BOOT IN
`1,426 `1,659
12 Months
Source: Company, Angel Research
For 1QCY2013, Abbott India (AIL) reported an 11.6% yoy growth in top-line at `420cr, although 3.2% lower than our estimate of `433cr. The EBITDA margin expanded by 313bp yoy, primarily due to lower raw material prices and lower other expenses. However, the adjusted net profit increased by just 17.1% yoy to `32cr, due to an exceptional item arising from write-back of depreciation and provision for expired goods in 1QCY2012. Top brands to keep performance upbeat, new product introductions to support: AILs merger with Solvay Pharma (SPIL) in CY2011, has provided AIL access to new therapeutic segments and additional brands. Currently, AIL has 10 products among the top 300 brands in the Indian pharmaceutical market. Moreover, continuous launch of new products in untapped therapeutic segments is expected to support growth in the long term. Solvay synergies to facilitate sustainable margin: Amalgamation of AIL with SPIL has led to operational synergies in its manufacturing plants. This has resulted in lower raw material cost as a percentage of sales, thus providing better margins. Cost saving measures from various transformation programs and lower promotional spends are expected to facilitate in sustaining EBITDA margin at higher levels. Outlook and valuation: We expect AIL to post a 12.2% CAGR in revenue to `2,081cr over CY2012-14E, while the EBITDA margin is expected to be marginally higher at 12.4% in CY2014, resulting from lower expenses. Hence, we expect the companys net profit to witness a 10.4% CAGR over CY2012-14E to `176cr. At the current market price, the stock is trading at a PE of 17.2x its CY2014E earnings. We maintain our Buy recommendation on the stock with a target price of `1,659 based on a target PE of 20x for CY2014E.
Shareholding Pattern (%) Promoters MF / Banks / Indian Fls FII / NRIs / OCBs Indian Public / Others 75.0 5.8 77.0 17.2
Abs. (%) Sensex Abbott India
3m (0.8)
1yr 14.0
3yr 12.4 52.3
(1.7) (11.5)
Key financials
Y/E December (` cr) Net Sales % chg Net Profit % chg EBITDA margin (%) EPS (`) P/E (x) P/BV (x) RoE (%) RoIC (%) EV/Sales (x) EV/EBITDA (x)
CY2011 1,490 50.5 165 170.4 12.7 77.7 18.4 5.6 38.8 85.7 1.9 14.7
CY2012 1,653 10.9 145 (12.3) 12.2 68.1 20.9 4.7 24.3 56.0 1.6 13.4
CY2013E 1,863 12.7 154 6.6 12.1 72.6 19.6 4.0 22.0 60.7 1.4 11.4
CY2014E 2,081 11.7 176 14.3 12.4 82.9 17.2 3.4 21.4 69.8 1.2 9.6
Shareen Batatawala
+91- 22- 3935 7800 Ext: 6849 shareen.batatawala@angelbroking.com
Please refer to important disclosures at the end of this report
Abbott India | 1QCY2013 Result Update
Exhibit 1: 1QCY2013 performance

Y/E December (` cr) Net Sales Net raw material (% of Sales) Staff Costs (% of Sales) Other Expenses (% of Sales) Total Expenditure EBITDA EBITDA margin (%) Interest Depreciation Other Income PBT (% of Sales) Tax (% of PBT) Reported PAT Extra-ordinary Items Adjusted PAT PATM (%) Equity capital (cr) EPS (`)
1QCY13 420 239 56.9 57 13.7 77 18.4 374 46 10.9 0 5 6.4 47 11.2 15 32.6 32 32 7.6 21 14.9
1QCY12 376 222 59.1 49 13.1 75 19.9 347 29 7.8 0 6 5.3 29 7.6 12 41.9 17 (10) 27 4.4 21 7.9
yoy chg (%) 11.6 7.5 16.1 3.3 7.8 56.4 313bp (11.7) 20.2 63.7 27.4 89.9 17.1
2QCY12 448 270 60.2 47 10.5 58 13.0 375 73 16.3 5 5.5 74 16.4 24 32.3 50 50 11.1 21
qoq chg (%) (6.3) (11.4) 22.2 32.5 (0.4) (37.0) (531)bp 9.6 15.6 (36.1) (35.5) (36.3) (36.3)
CY12 1,653 972 58.8 206 12.5 273 16.5 1,451 202 12.2 0 19 22 205 12.4 70 34.3 134 (10) 145 8.1 21
CY11 1,490 848 56.9 167 11.2 286 19.2 1,302 189 12.7 0 15 51 225 15.1 60 26.6 165 0 165 11.1 21 77.7
% chg 10.9 14.6 23.2 (4.5) 11.5 7.0 (44)bp 29.9 (56.5) 12.6 17.6 (18.6) (12.3)
89.9
23.4
(36.3)
63.2
(18.6)
Exhibit 2: Actual vs Estimates (1QCY2013)

(` cr) Total Income EBIDTA EBIDTA margin (%) Adjusted PAT
Actual 420 46 10.9 32
Estimate 433 55 12.7 38
Var (%) (3.2) (16.6) (176)bp (16.2)
Lower than expected results

For 1QCY2013, AIL reported an 11.6% yoy growth in top-line at `420cr, although 3.2% lower than our estimate of `433cr. The EBITDA margin expanded by 313bp yoy, primarily due to lower raw material costs. However, the adjusted net profit increased by just 17.1% yoy to `32cr in spite of a 56.4% yoy growth in EBITDA during 1QCY2013 due to an exceptional item of `10cr in 1QCY2012 from write-back of depreciation and provision for expired goods. The tax rate for the quarter was lower at 32.6% as compared to 41.9% for 1QCY2013.
May 2, 2013
Investment rationale
Top brands to keep the performance upbeat
AIL has been reporting a better performance as compared to the Indian pharmaceutical industry for the past few years. Currently, the company has 10 of its brands in the top 300 brands in the market - 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 over a period of time.
New product introductions to add value

AIL has been continuously launching new products in order to enter new product categories or garner a higher share in the existing product categories. It entered the large PPI (Proton Pump Inhibitors) segment with the launch of Adiza (Ilaprazole). In addition, the company also launched Omacor in the Cardiology segment, Prothiaden- M in depression segment and Obimet GX Forte in diabetes segment. AIL is currently in the process of completely overhauling its new product launch processes to double the number of new launches per year. This would add to the companys top-line in the long run.
Solvay synergies to facilitate sustainable margin

Post AILs merger with SPIL, AIL derived operational synergies by transferring three brands and eight SKUs to its own manufacturing plant in Goa. This has resulted in 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 the EBITDA margin at higher levels.
Strong balance sheet

AIL is a debt-free company with cash reserves of `325cr as of December 2012, and RoE and RoIC of 24.3% and 56.0%, respectively, for CY2012. We expect the cash to increase to `567cr by CY2014E end, with RoE and RoIC expected to be at 21.4% and 69.8%, respectively, for CY2014E. Due to high cash reserves in the books, we believe there is a potential that the company may go for delisting.
May 2, 2013
Financials
Exhibit 3: Change in estimates
Y/E December Net sales (` cr) EBITDA margin (%) EPS (`)
Source: Angel Research
Earlier estimates CY2013E 1,926 13.1 79.0 CY2014E 1,926 13.5 90.8
Revised estimates CY2013E 1,863 12.1 72.6 2,081 12.4 82.9
% chg CY2014E 8.0 (112)bp (8.6) (3.3) (102)bp (8.1)
CY2014E CY2013E
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 12.2% CAGR over CY2012-14E to `2,081cr in CY2014E.
Exhibit 4: Increasing focus on employee spend

240 200 160 10.3 9.5 120 80 40 47 0 CY2007 CY2008 CY2009 CY2010 CY2011 CY2012 Employee cost (LHS) % of net sales 63 78 111 167 206 8.0 11.2 11.2 12.5 13 12 11
Exhibit 5: Revenue growth to moderate

2,000 1,600 1,200 50.5 60 50 40
( ` cr)
(%)
10 9 8
( ` cr)
800 14.3 400 0 CY2009 CY2010 CY2011 CY2012 CY2013E CY2014E Revenue (LHS) Revenue growth (RHS) 10.9 12.7 11.7
20
1,490
1,653
1,863
2,081
761
990
10 0
May 2, 2013
(%)
30.1
30
EBITDA margin to sustain at higher levels

A better product mix post merger has led to a decline in the net raw material cost (as a percentage of net sales). Moreover, cost saving measures from various transformation programs and curtailing of promotional expenses has led to a reduction in other expenses. We believe this would lead to a sustainable EBITDA margin in the range of 12.0-12.5% going forward. This would consequently lead to a 10.4% CAGR growth in adjusted net profit over CY2012-14E to `176cr in CY2014E.
Exhibit 6: Sustainable EBITDA margin

250 200 150 12.8 11.4 14 12.7 12.2 12.1 13 12 11
Exhibit 7: Modest profit growth

210 180 150 10.2 8.8 8.3 8.5 11.1 12 11 10 9 8 7 6.2 78 CY2009 61 CY2010 165 CY2011 PAT (LHS) 145 CY2012E 154 CY2013E 176 CY2014E 6 5 PAT margin (RHS)
( ` cr)
(%)
100 50 97 0 CY2009 CY2010 CY2011 CY2012E CY2013E CY2014E EBITDA (LHS) EBITDA margin (RHS) 69 189 7.0 202 225 258
9 8 7 6
90 60 30 0
Outlook and valuation

We have revised our revenue upwards and earnings estimates slightly downwards for CY2013E and CY2014E. At current levels, the stock is trading at a PE of 7.2x its CY2014E earnings and P/BV of 3.4x for CY2014E. We maintain our Buy recommendation on the stock with a target price of `1,659 based on a target PE of 20x for CY2014E.
Exhibit 8: One-year forward PE band

2,400 2,000 1,600
(` )
1,200 800 400 0 May-09 Price
May-10 10x
May-11 15x
May-12 20x 25x
May 2, 2013
(%)
10
( ` cr)
120
Key concerns
Shift of focus to the 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 the new drug pricing policy

The New Pharmaceutical Pricing Policy (NPPP) draft note released by the Department of Pharmaceuticals 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. The government is in the process of approving the control on prices, which are to be based on simple average of all the drugs (sold by various companies) in a particular segment with minimum 1% market share, that price would be lower than the maximum currently charged in that segment. AIL currently has ~40% of its drugs under price control. Hence change in drug pricing policy would impact the companys top-line
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 (from 18 earlier), and caters 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.
May 2, 2013
Profit & Loss Statement

Y/E December (` cr) Gross sales Less: Excise duty Net Sales Other operating income Total operating income % chg Net Raw Materials Other Mfg costs Personnel Other Total Expenditure EBITDA % chg (EBITDA margin) Depreciation EBIT % chg (% of Net Sales) Interest & other charges Other Income (% of sales) PBT % chg Tax (% of PBT) PAT (reported) Extraordinary (Exp)/Inc. ADJ. PAT % chg (% of Net Sales) Basic EPS (`) Fully Diluted EPS (`) % chg 990 30.1 647 7 111 155 920 69 (28.6) 7.0 11 58 (34.1) 5.9 0 36 3.6 94 (34.0) 33 35.3 61 (0) 61 (21.4) 6.2 44.6 44.6 (21.4) 1,490 50.5 848 8 167 278 1,302 189 171.5 12.7 15 174 198.2 11.6 0 51 3.4 225 198.4 60 26.6 165 165 170.4 11.1 77.7 77.7 74.0 1,653 10.9 972 9 206 264 1,451 202 7.0 12.2 19 182 5.0 11.0 0 22 1.3 205 5.0 70 34.3 134 (10) 145 (12.3) 8.8 63.2 68.1 (12.3) 1,863 12.7 1,100 9 231 298 1,639 225 11.3 12.1 21 204 11.9 11.0 26 1.4 230 11.9 76 33.0 154 154 6.6 8.3 72.6 72.6 6.6 2,081 11.7 1,219 13 258 333 1,823 258 14.7 12.4 24 234 14.6 11.2 29 1.4 263 14.6 87 33.0 176 176 14.3 8.5 82.9 82.9 14.3 CY2010 996 6 990 CY2011 1,508 18 1,490 CY2012 1,675 22 1,653 CY2013E 1,887 24 1,863 CY2014E 2,108 27 2,081
May 2, 2013
Balance Sheet
Y/E December (` cr) SOURCES OF FUNDS Equity Share Capital Reserves& Surplus Shareholders Funds Total Loans Deferred Tax Liability (net)
Other Long Term Liabilities Long Term Provisions
CY2010 14 292 305 0 306 118 69 50 1 403 189 20 129 65 148 255 306
CY2011 21 523 544 (6) 15 553 192 112 80 0 25 686 259 35 255 133 5 239 448 553
CY2012 21 626 647 1 29 678 204 95 109 1 23 775 325 43 264 141 3 230 545 678
CY2013E 21 735 757 1 29 787 234 116 119 1 23 852 465 48 211 124 3 206 645 787
CY2014E 21 867 888 1 29 919 269 139 130 1 23 995 568 54 232 138 3 230 766 919
Total Liabilities APPLICATION OF FUNDS Gross Block Less: Acc. Depreciation Net Block Capital Work-in-Progress Goodwill Investments Long term loans and adv. Current Assets Cash Loans & Advances Inventory Debtors Other current assets Current liabilities Net Current Assets Mis. Exp. not written off Total Assets
May 2, 2013
Cash Flow Statement

Y/E December (` cr) Profit before tax Depreciation Change in Working Capital Other income Direct taxes paid Others Cash Flow from Operations (Inc.)/Dec. in Fixed Assets (Inc.)/Dec. in Investments (Inc.)/Dec. in L.T.Loans & advances Deposits having maturity more than 3m Other income Others Cash Flow from Investing Issue of Equity Inc./(Dec.) in loans Dividend Paid (Incl. Tax) Others Cash Flow from Financing Cash acquired on amalgamation Inc./(Dec.) in Cash Opening Cash balances Closing Cash balances CY2010 CY2011 CY2012 CY2013E CY2014E 94 11 (18) (36) (33) 27 46 (12) 10 36 (40) (6) (27) (0) (27) 13 176 189 225 15 (122) (51) (60) 18 24 (73) (31) (32) 51 122 37 8 (42) (8) (42) 51 70 189 259 205 19 (32) (22) (70) 2 101 (12) (65) 22 61 6 (42) (0) (42) 66 259 325 230 21 41 (26) (76) 189 (31) 26 (4) (44) (44) 140 325 465 263 24 (18) (29) (87) 153 (35) 29 (6) (44) (44) 103 465 568
May 2, 2013
Key Ratios
Y/E December (` cr) Valuation Ratio (x) P/E (on FDEPS) P/CEPS P/BV Dividend yield (%) EV/Sales EV/EBITDA EV / Total Assets Per Share Data (`) EPS (Basic) EPS (fully diluted) Cash EPS DPS Book Value Dupont Analysis EBIT margin Tax retention ratio Asset turnover (x) ROIC (Post-tax) Cost of Debt (Post Tax) Leverage (x) Operating ROE Returns (%) ROCE (Pre-tax) Angel ROIC (Pre-tax) ROE Turnover ratios (x) Asset Turnover Inventory / Sales (days) Receivables (days) Payables (days) WC (ex-cash) (days) Solvency ratios (x) Net debt to equity Net debt to EBITDA Interest Coverage (0.6) (2.7) 1,455.1 (0.5) (1.4) 5,785.9 (0.5) (1.6) (0.6) (2.1) (0.6) (2.2) 8.8 43 20 52 21 9.6 47 24 54 30 8.4 57 24 50 45 8.5 47 24 46 39 8.3 39 24 46 33 20.1 54.4 21.2 40.6 85.7 38.8 29.6 56.0 24.3 27.9 60.7 22.0 27.4 69.8 21.4 5.9 0.6 3.4 13.0 (0.6) 11.6 0.7 3.5 29.8 (0.5) 11.0 0.7 4.7 34.0 (0.5) 11.0 0.7 5.8 42.5 (0.6) 11.2 0.7 5.9 44.6 (0.6) 44.6 44.6 52.9 17.0 223.3 77.7 77.6 84.7 17.0 256.1 68.1 68.1 72.4 17.0 304.4 72.6 72.6 82.3 18.0 356.1 82.9 82.9 94.1 18.0 418.1 49.6 52.9 9.9 1.2 2.9 40.9 9.3 18.4 84.7 5.6 1.2 1.9 14.7 5.0 20.9 18.5 4.7 1.2 1.6 13.4 4.0 19.6 17.3 4.0 1.3 1.4 11.4 3.3 17.2 15.1 3.4 1.3 1.2 9.6 2.7 CY2010 CY2011 CY2012 CY2013E CY2014E
May 2, 2013
10
Research Team Tel: 022 - 39357800
E-mail: research@angelbroking.com
Website: www.angelbroking.com
DISCLAIMER
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Disclosure of Interest Statement 1. Analyst ownership of the stock 2. Angel and its Group companies ownership of the stock 3. Angel and its Group companies' Directors ownership of the stock 4. Broking relationship with company covered
Abbott India No No No No
Note: We have not considered any Exposure below ` 1 lakh for Angel, its Group companies and Directors
Ratings (Returns):
Buy (> 15%) Reduce (-5% to -15%)
Accumulate (5% to 15%) Sell (< -15%)
Neutral (-5 to 5%)
May 2, 2013
11

Abbott India 1Q CY 2013

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Abbott India 1Q CY 2013

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1QCY2013 Result Update | Pharma

Source: Company, Angel Research

Abs. (%) Sensex Abbott India

3yr 12.4 52.3

Please refer to important disclosures at the end of this report