Abbott India ACCUMULATE. Performance Highlights. CMP `3,405 Target Price `3,711. 2QFY2015 Result Update Pharma. Key financials

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1 2QFY2015 Result Update Pharma November 22, 2014 Abbott India Performance Highlights Y/E March (` cr) 2QFY2015 3QCY2013 % chg (yoy) 1QFY2015 % chg (qoq) Net sales EBITDA EBITDA margin bps Adjusted PAT Source: Company, Angel Research For 2QFY2015, Abbott India (AIL) reported a good set of results. Its top-line grew by 28.9% yoy to `589cr. Although the raw material cost as a percentage of sales increased marginally by 47bp yoy to 58%, the employee and other expenses as a percentage of sales declined by 49bp yoy and 59bp yoy to 12.9% and 14.1% respectively. As a result, the EBITDA margin witnessed a slight improvement of 61bp yoy to 14.9%. Owing to higher top-line and better margins, the net profit during the period grew by 41% yoy to `64cr. Note: The company shifted reporting from calendar year to financial year starting 1QFY2015. Thus, FY2014 comprises of 5 quarters. Top brands to aid growth, new product introductions to support: AIL s performance is a reflection of its strong brand equity. Currently, it has 14 brands that feature in the top 3 positions in their respective participated markets. We expect that these top brands will facilitate revenue growth for the company in the future. Moreover, the company continues to launch new products in order to enter new product categories or to garner a higher share in the existing product categories. These new launches are expected to be revenue drivers for the company in the long run. Strong Balance Sheet: AIL is a debt-free company with cash reserves of `559cr as of September 30, We expect the cash reserve to increase to `773cr by FY2016 end. AIL has a strong ROE and ROIC profile which we expect to be at 28.0% and 78.5% respectively in FY2015E and at 27.0% and 79.6% respectively in FY2016E. Outlook and valuation: On the back of good performance by its major brands and continuous new launches, we expect the company s top-line and profit to improve to `2,781cr and `303cr respectively in FY2016E. At the current market price, the stock is trading at 23.9x PE for FY2016E which we believe is undervalued compared to its multinational pharma peers Sanofi and GlaxoSmithKline Pharma trading at 28.2x and 48.8x respectively. We have an Accumulate recommendation on the stock with a target price of `3,711 based on a target PE of 26x for FY2016E. ACCUMULATE CMP `3,405 Target Price `3,711 Investment Period 12 Months Stock Info Sector Pharmaceuticals Market Cap (` cr) 7,235 Net Debt (463) Beta Week High / Low 3,538 / 1,461 Avg. Daily Volume 1,928 Face Value (`) 10 BSE Sensex 28,335 Nifty 8,477 Reuters Code ABOT.BO Bloomberg Code BOOT IN Shareholding Pattern Promoters 75.0 MF / Banks / Indian Fls 9.2 FII / NRIs / OCBs 0.3 Indian Public / Others 15.5 Abs. 3m 1yr 3yr Sensex ABBOTINDIA Key financials Y/E March (` cr) CY2012 FY2014* FY2015E FY2016E Net Sales 1,653 2,297 2,365 2,781 % chg Net Profit % chg EBITDA margin EPS (`) P/E (x) P/BV (x) RoE RoIC EV/Sales (x) EV/EBITDA (x) Source: Company, Angel Research; Note: CMP as on November 21, 2014; *reporting changed from CY to FY starting 1QFY15 Milan Desai Ext: 6846 milan.desai@angelbroking.com Please refer to important disclosures at the end of this report 1

2 Exhibit 1: 2QFY2015 performance Y/E December (` cr) 2QFY2015 3QCY2014* yoy chg 1QFY2015 qoq chg 1HFY2015 1HFY2014 % chg Net Sales , Net raw material (% of Sales) bps (114)bps Staff Costs (% of Sales) (49)bps bps Other Expenses (% of Sales) (59)bps (122)bps Total Expenditure Operating Profit EBITDA margin Interest Depreciation (12.4) Other Income PBT (% of Sales) Tax (% of PBT) Reported PAT Extra-ordinary Items Adjusted PAT PATM Source: Company, Angel Research; Note: *reporting changed from CY to FY starting 1QFY15 Results impress on all fronts For 2QFY2015, AIL reported a good set of results. Its top-line grew by 28.9% yoy to `589cr. Although the raw material cost as a percentage of sales increased marginally by 47bp yoy to 58%, the employee and other expenses as a percentage of sales declined by 49bp yoy and 59bp yoy to 12.9% and 14.1% respectively. As a result, the EBITDA margin witnessed a slight improvement by 61bp yoy to 14.9%. During the quarter, the other income grew by 75.7% yoy to `12cr which also included profit from the sale of residential property amounting to `1.9cr. On the back of higher top-line and adjusting for profit from the sale of residential property, the net profit grew by 36.9% yoy to `62cr. For 1HFY2015, the company s top-line has shown good improvement, growing by 24.2% yoy to `1,114cr. For this period, the company benefitted from an 114bp yoy decline in raw material cost a percentage of sales and 122bp yoy decline in other expenses as a percentage of sales to 57.5% and 14.8% respectively, which resulted in EBITDA margins expanding by 216bp yoy to 14.2%. Also, other income increased by 59.5% yoy to `22cr for the six-month period. Owing to a surge in top-line coupled with better operating performance, the adjusted net profit for 1HFY2015 improved by 49.6% yoy to `112cr. November 22,

3 Exhibit 2: Revenue growth picking up (`cr) Revenue (LHS) yoy growth (RHS) QCY12 4QCY12 1QCY13 2QCY13 3QCY13 4QCY13 1QCY14* 1QFY15 2QFY Exhibit 3: Margin improvement with stable RM cost EBITDA margin Net RM as % of net sales (RHS) QCY12 4QCY12 1QCY13 2QCY13 3QCY13 4QCY13 1QCY14* 1QFY15 2QFY15 Source: Company, Angel Research, Note: *reporting changed from CY to FY starting 1QFY15 Source: Company, Angel Research, Note: *reporting changed from CY to FY starting 1QFY15 Investment rationale Top brands to keep the performance upbeat AIL s performance is a reflection of its strong brand equity. Currently, it has 14 brands that feature in the top 3 positions in their respective participated markets. Key brands like Duphaston, Udiliv and Duphalac have generated more than `250cr in revenue for the company while it s recently launched brand Titaferon, is performing well. We expect these top brands to facilitate revenue growth for the company going forward. Exhibit 4: Top Brand Performance Brand Name Market Share Rank THYRONORM 48 1 DUPHASTON 20 1 DIGENE 18 2 UDILIV 24 1 VERTIN 30 1 DUPHALAC 14 1 CREMAFFIN 11 2 ZOLFRESH 17 1 CREMAFFIN PLUS 7 3 CREON 38 1 BRUFEN 98 1 Source: IMS April MAT 2014 New product introductions to add value in long run AIL has been continuously launching new products in order to enter new product categories or to garner a higher share in the existing product categories. During the past year, it has launched Vertin OD Tablet (Vertigo), Dufaxamin tablet (Hepatic encephalopathy), Arachitol chewable tablets (Vitamin D3), Brufit tablet (Acute pain) and Titaferon injection (Hepatitis C). Of this Titaferon has emerged as a leading brand in its therapeutic area. November 22,

4 In order to expand its presence in the nutritional segment, the company has set up and started production at its facility in Jhagadia, Gujarat. It plans on manufacturing nutritional products like Similac (infants), PediaSure (toddlers), Ensure (adult), Mama s Best (expectant and breastfeeding moms), and Glucerna (diabetics). We expect these new launches to be strong revenue drivers for the company in the long run. Additionally, efforts made by the company to expand its presence in the nutritional segment will contribute to overall performance (brands like PediaSure are performing better than the competition). Strong balance sheet AIL is a debt-free company with cash reserves of `559cr as of September 30, We expect the cash reserve to increase to `773cr by FY2016 end. The company enjoys strong RoE and RoIC AIL which we expect to be at 28.0% and 78.5% respectively in FY2015E and at 27.0% and 79.6% respectively in FY2016E. November 22,

5 Financials 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 (8.0% as a percentage of sales in CY2007 to 13.5% in FY2014- adj), which form a critical part of a pharmaceutical company, would facilitate medium to long term revenue growth. We expect revenue in FY2015E to be at `2,365cr and `2,781cr in FY2016E. Exhibit 5: Revenue growth trend Exhibit 6: Operating margin to improve (` cr) 3,200 2,800 2,400 2,000 1,600 1, Revenue (LHS) ,019 1,490 1,653 Revenue growth (RHS) ,297 2, CY2010 CY2011 CY2012 FY2014E* FY2015E FY2016E 2, (` cr) EBITDA (LHS) EBITDA margin (RHS) CY2010 CY2011 CY2012E FY2014* FY2015E FY2016E Source: Company, Angel Research, Note: *reporting changed from CY to FY starting 1QFY15 Source: Company, Angel Research, Note: *reporting changed from CY to FY starting 1QFY15 EBITDA margin to sustain at higher levels A better product mix post the merger of Solvay Pharma has led to 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 be at 14.8% in FY2015E and 15.2% for FY2016E. This would consequently lead to adjusted net profit improving to `250cr in FY2015E and `303cr in FY2016E Exhibit 7: Improvement in RM cost as a percentage of sales 1,800 1,600 1,400 1,200 (` cr) 1, ,331 1,344 1,570 CY2010 CY2011 CY2012 FY2014* FY2015E FY2016E Net raw material cost (LHS) % of net sales (RHS) Source: Company, Angel Research, Note: *reporting changed from CY to FY starting 1QFY15 November 22,

6 Exhibit 8: Relative valuation Year End 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 of AIL. We expect the company s top-line and profit to improve to `2,781cr and `303cr respectively in FY2016E. At current market price, the stock is trading at 23.9x PE for FY2016E which we believe is undervalued compared to its multinational pharma peers Sanofi and GlaxoSmithKline Pharma which trade at 28.2x and 48.8x respectively. We have an Accumulate recommendation on the stock with a target price of `3,711 based on a target PE of 26x for FY2016E. Mcap (` cr) Sales (` cr) OPM PAT (` cr) EPS (`) RoE P/E (x) P/BV (x) EV/sales (x) Abbott India FY2016E 7,235 2, Sanofi CY2015E 8,471 2, GSK Pharma CY2015E 24,874 2, Source: Angel Research Exhibit 9: One-year forward PE band 4,000 3,500 3,000 2,500 2,000 (`) 1,500 1, Nov-09 Nov-10 Nov-11 Nov-12 Nov-13 Nov-14 Source: Company, Angel Research Price 12x 16x 22x 26x 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 PHL s business, there is a possibility that the parent company shifts its focus to the unlisted entity. Also, the merger would limit listed AIL s access to untapped therapeutic segments where PHL already exists. November 22,

7 Impact of the new drug pricing policy According to the new drug pricing order, Govt. 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 per cent market share will be priced only by fixing a Ceiling Price (CP). Manufacturers would be free to fix any price for their products equal to or below the ceiling price. AIL currently has ~40% of its drugs under price control. Hence, any change in drug pricing policy would impact the company s 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 30 distribution points and ~12,000 sales force catering to 4,900 stockists and 1,50,000 retailers. AIL s employee count increased from 2,425 in CY2011 to 2,700 in FY2014. The company caters to a wide range of therapeutic segments like Gastroenterology, Women s health, CNS, Metabolics, Pain management, Anaesthesia, Neonatology, Vitamins, etc. November 22,

8 Profit & Loss Statement Y/E March (` cr) CY2011 CY2012 FY2014 FY2015E FY2016E Total operating income 1,490 1,653 2,297 2,365 2,781 % chg Net Raw Materials ,331 1,344 1,570 Power & Fuel costs Personnel Other expenses Total Expenditure 1,315 1,451 2,029 2,014 2,358 EBITDA % chg (% of Net Sales) Depreciation& Amortisation EBIT % chg (% of Net Sales) Interest & other charges Other Income (% of sales) Exceptional Items PBT % chg Tax (% of PBT) PAT (reported) Extraordinary (Exp)/Inc ADJ. PAT % chg (% of Net Sales) Basic EPS (`) Fully Diluted EPS (`) % chg Note: reporting changed from CY to FY starting 1QFY15 November 22,

9 Balance Sheet Y/E March (` cr) CY2011 CY2012 FY2014 FY2015E FY2016E SOURCES OF FUNDS Equity Share Capital Reserves& Surplus ,233 Shareholders Funds ,254 Total Loans Deferred Tax Liability (net) (6) 1 (1) (4) (4) Other Long Term Liabilities Long Term Provisions Total Liabilities ,052 1,310 APPLICATION OF FUNDS Gross Block Less: Acc. Depreciation Net Block Capital Work-in-Progress Goodwill Investments Long term loans and adv Current Assets ,003 1,206 1,500 Cash Loans & Advances Inventory Debtors Other current assets Current liabilities Net Current Assets ,144 Other Non Current Assets Mis. Exp. not written off Total Assets ,052 1,310 Note: reporting changed from CY to FY starting 1QFY15 November 22,

10 Cash Flow Statement Y/E March (` cr) CY2011 CY2012 FY2014 FY2015E FY2016E Profit before tax Depreciation Change in Working Capital (122) (32) (25) (69) (57) Other income (20) (22) (48) (42) (48) Direct taxes paid (60) (70) (96) (122) (147) Others 31 (8) Cash Flow from Operations (Inc.)/Dec. in Fixed Assets (73) (13) (6) (30) (36) (Inc.)/Dec. in Investments (Inc.)/Dec. in L.T.Loans & advances (25) 2 (11) (2) - Deposits having maturity more than 3m 19 (65) (171) - - Other income Others 65 (5) (3) - - Cash Flow from Investing 5 (59) (143) Issue of Equity Inc./(Dec.) in loans Dividend Paid (Incl. Tax) (42) (42) (57) (45) (45) Others Cash Flow from Financing (10) (45) (45) Cash acquired on amalgamation Inc./(Dec.) in Cash Opening Cash balances Closing Cash balances Note: reporting changed from CY to FY starting 1QFY15 November 22,

11 Key Ratios Y/E March (` cr) CY2011 CY2012 FY2014 FY2015E FY2016E 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) (0.5) (0.5) (0.5) (0.6) (0.6) 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 (0.5) (0.5) (0.6) (0.6) (0.6) Net debt to EBITDA (2.3) (1.6) (1.7) (1.7) (1.8) Interest Coverage 3, Note: reporting changed from CY to FY starting 1QFY15 November 22,

12 Research Team Tel: Website: DISCLAIMER This document is solely for the personal information of the recipient, and must not be singularly used as the basis of any investment decision. Nothing in this document should be construed as investment or financial advice. Each recipient of this document should make such investigations as they deem necessary to arrive at an independent evaluation of an investment in the securities of the companies referred to in this document (including the merits and risks involved), and should consult their own advisors to determine the 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, make investment decisions that are inconsistent with or contradictory to the recommendations expressed herein. The views contained in this document 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 and trading volume, as opposed to focusing on a company's fundamentals and, as such, may not match with a report on a company's fundamentals. The information in this document has been printed on the basis of publicly available information, internal data and other reliable sources 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 this document is for general guidance only. Angel Broking Pvt. Limited or any of its affiliates/ group companies shall not be in any way responsible 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 cannot testify, 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 be regulatory, compliance, or other reasons that prevent us from doing so. This document is being supplied to you solely for your information, and its contents, information or data may not be reproduced, redistributed or passed on, directly or indirectly. Angel Broking Pvt. Limited and its affiliates may seek to provide or have engaged in providing corporate finance, investment banking or other advisory services in a merger or specific transaction to the companies referred to in this report, as on the date of this report or in the past. Neither Angel Broking Pvt. Limited, nor its directors, employees or affiliates shall be liable for any loss or damage that may arise from or in connection with the use of this information. Note: Please refer to the important 'Stock Holding Disclosure' report on the Angel website (Research Section). Also, please refer to the latest update on respective stocks for the disclosure status in respect of those stocks. Angel Broking Pvt. Limited and its affiliates may have 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 Note: We have not considered any Exposure below ` 1 lakh for Angel, its Group companies and Directors Ratings (Returns): Buy (> 15%) Accumulate (5% to 15%) Neutral (-5 to 5%) Reduce (-5% to -15%) Sell (< -15%) November 22,