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Abbott: Other income fillip

Oct 1, 2004

Performance summary
Abbott India has declared its 3QFY05 results (November year ending). The net profit of the company has grown by 120 % in the August quarter, other income having provided a large chunk of this growth. The topline growth has however been marginal. Operating margins too have been disappointing and have declined by 310 basis point to 22% from 25% on a YoY basis. For the nine-month period however the picture has been encouraging as far as topline is concerned, with a growth of 9%. The operating margin for 9mFY05, however, has declined by 50 basis points.

(Rs m) 3QFY04 3QFY05 Change 9mFY04 9mFY05 Change
Net sales 1,041 1,046 0.4% 2,754 2,998 8.8%
Other income 23 314 1271.5% 152 495 226.5%
Expenditure 780 816 4.6% 2,144 2,347 9.5%
Operating profit (EBDITA) 261 230 -12.0% 610 651 6.6%
Operating profit margin (%) 25.1% 22.0%   22.2% 21.7%  
Interest 0 -   1 1  
Depreciation 11 10 -5.0% 31 30 -5.2%
Profit before tax 273 534 95.3% 730 1,116 52.8%
Tax 77 101 30.8% 199 257 29.2%
Profit after tax/(loss) 196 433 120.6% 531 858 61.6%
Net profit margin (%) 18.9% 41.4%   19.3% 28.6%  
No. of shares (m) 15.3 15.3   15.3 15.3  
Diluted earnings per share (Rs)*       34.8 56.2  
P/E ratio (x)         10.9  
(* annualised)            

What’s 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. The company has reported a steady 6.6% topline CAGR over the last five years. However, its bottomline has remained stagnant at since FY00. However, company in India 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 3QFY05?
Sales:  The sales of the company remained almost stagnant in the August quarter. But this should be viewed in context that there was pent up demand in the same quarter last year after the truckers' strike and VAT fiasco. The company launched as many as 4 new products last year, however, due to lack of data we can not comment on the performance of these products.

Operating margins:  Abbott has done pretty well on the operational front as compared to its peers (other MNC pharma companies). While the company has been able to maintain a higher operating margin compared to its peers, the operating margin declined by 290 basis points in the August quarter of this financial year. The basic reason for this could be increase in the prices of purchased goods. Due to an up-trend in the petrochemical cycle the cost of raw material has increased which has resulted in higher cost of purchased goods of the company. The increase in purchase of goods and decrease in raw material consumption suggest that company has increased the outsourcing of its products to other manufacturers.

Cost Structure 9mFY04 9mFY05 % sales 9mFY04 % sales 9mFY05
Raw Material 391 124 14% 4%
Staff Cost 161 193 6% 6%
Purchase of Finished goods 1232 1709 45% 57%
Others 359 321 13% 11%
Total 2143 2347 77.8% 78.3%

While the OPM of the company has declined the net profit margin of the company has increased substantially by 23-percentage points. However, the spurt in NPM is due to higher other income, which arose due to profit arising from sale of mutual fund units that the company was holding. However, if we exclude other income the PBT margin of the company has actually declined by 300 basis points.

Over the last five quarters
There has been a consistency in Abbott's performance (in terms of average growth in topline) over the last five quarters. While the NPM of the company has increased in the last quarter the sales growth has been in line with the industry growth. There has been dip in sales growth in the third quarter of the of FY05 (high base effect), the overall performance of in last four quarters is commendable considering the fact that the products of the company are mostly old and competition is high.

What to expect?
At Rs 610 the stock is trading at 11x its annualised 9mFY05 earnings. Higher share of traded goods in the topline gives an indication of the company’s weak presence in the Indian markets. That is probably the reason why the stock is trading at such low valuations. However, this type of business model can be highly effective once the new product patent regime becomes applicable in India. Post 2005, the company can aggressively launch new products in the Indian markets. In our view, there are better visible stories within the pharma sector.

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