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Abbott: Consistently inconsistent! - Views on News from Equitymaster
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Abbott: Consistently inconsistent!
Jun 30, 2005

Performance Summary
MNC pharma company, Abbott India has announced mixed results for the second quarter and half year ending May 2005 (November year ending). The topline has grown in 2QFY06 and 1HFY06 despite VAT related concerns, which have plagued its peers in the pharmaceutical industry. However, inefficiencies at the operating level have dented the bottomline picture.

Financial performance: A snapshot
(Rs m) 2QFY05 2QFY06 Change 1HFY05 1HFY06 Change
Net sales 1,022 1,138 11.3% 1,952 2,035 4.3%
Expenditure 799 948 18.6% 1,531 1,683 9.9%
Operating profit (EBIDTA) 224 191 -14.7% 421 353 -16.2%
Operating profit margin (%) 21.9% 16.7%   21.6% 17.3%  
Other income 106 32 -69.4% 181 63 -65.0%
Interest (net) 1 - - 1 - -
Depreciation 10 10 4.1% 20 19 -3.6%
Profit before tax 319 213 -33.2% 582 397 -31.7%
Exceptional items (expense) - (1) - - (1) -
Tax 88 62 -30.0% 156 118 -24.4%
Profit after tax 231 150 -34.9% 425 278 -34.7%
Net profit margin (%) 22.6% 13.2%   21.8% 13.7%  
No. of shares (m) 15.3 15.3   15.3 15.3  
Diluted earnings per share (Rs)*         36.3  
P/E ratio (x)         16.6  
(* annualised)            

What is the company’s business?
Abbott India is a 38% subsidiary of Abbott Laboratories Inc. US. Abbot Laboratories (a global healthcare company with focus on pharmaceuticals, nutritional and medical products including devices and diagnostics) is one of the world's largest pharma companies (5th largest). Abbott India focuses on core therapeutic areas in pharmaceuticals, namely urology, gastroenterology, pain management, benign prostatic hyperplasia and specialized anesthesia range, with well-known brands like Brufen, Digene, Cremaffin, Hytrin and Norvir. In India, Abbott is principally a trading company and most of its products are either imported from its parent or outsourced to other manufacturers in India.

What has driven performance in 2QFY06?
Outpaces peers: Abbott reported a robust 11% YoY growth in revenues during the quarter. The company attributed this to an increase in offtake in 2QFY06 after implementation of VAT. The growth in revenues is commendable considering the fact that most of its peers (especially MNCs) in the pharma industry have reported declining sales during the quarter. For 1HFY06, the company recorded a relatively slower 4% YoY growth in revenues (VAT uncertainties had adversely impacted revenues in 1QFY06). The company caters to the lifestyle segment and focuses on its core therapeutic areas, which are CNS products, diabetes and urology. With lifestyle diseases on the rise, the company is expected to capitalize on this opportunity going forward.

Margins under pressure: Abbott has faced severe pressure on the operational front with a 520 basis points decline in margins as compared to its peers like Glaxo and Pfizer, which have shown considerable margin expansion owing to better efficiencies. The company has attributed the decline in operating margins in 2QFY06 and 1HFY06 to the levy of excise duty on the basis of MRP. There has been a considerable increase in the purchase of finished goods and other expenses (as a percentage of sales), which have put further pressure on margins. The increase in purchase of goods and decrease in raw material consumption also suggests that company has increased the outsourcing of its products to other manufacturers.

Cost break-up
(% sales) 2QFY05 2QFY06 1HFY05 1HFY06
(Increase)/decrease in stock -3.5% 1.7% -0.8% -3.7%
Consumption of raw materials 4.1% 2.3% 4.5% 2.1%
Purchase of finished goods 60.8% 63.6% 57.9% 66.8%
Staff cost 6.4% 5.8% 6.5% 6.3%
Other expenditure 10.2% 9.9% 10.4% 11.2%

Reflected in the bottomline: Reduced operating margins coupled with a decline in other income trickled into the bottomline which dipped 35% YoY during the quarter. The company had received income from sale of mutual funds units to the tune of Rs 0.2 m in 2QFY06 as against Rs 83 m in the corresponding previous period, aiding the fall in the bottomline.

Over the last few quarters: There has been an inconsistency in Abbott's performance over the last few quarters. Revenue growth has witnessed a seesaw performance highlighting lack of direction. Operating margins too have remained lacklustre, witnessing virtually no improvement.

What to expect?
At the current price of Rs 604, the stock is trading at a price to earnings multiple of 16.6 times annualised 1HFY06 earnings. Higher share of traded goods in the topline gives an indication of the company’s weak presence in the Indian markets. However, this type of business model can be highly effective, now that the new product patent regime has become applicable in India. Post 2005, the company can aggressively launch new products in the Indian markets. That is probably the reason why the stock is trading at high valuations. In our view, there are better visible stories within the pharma sector.

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