Abbott India - Controlled costs drive margins - ICICI Securities

Abbott India Limited's (AIL) Q2FY21 performance was muted and lower than our estimates, however, controlled costs boosted margin. Revenue remained flat YoY to Rs10.5bn (I-Sec: Rs11.2bn), EBITDA margin grew 340bps YoY to 22.8% (I-Sec: 22.0%) and adj. PAT grew 1.3% YoY to Rs1.8bn (I-Sec: Rs2.0bn). The muted performance was due to slowdown in demand in some therapeutic areas due to the challenging environment. We expect recovery in the coming quarters with easing of lockdown and remain positive on the company considering its exposure exclusively in domestic formulations, strong balance sheet with deep cash reserves, high return ratios and strong brand equity built over the years. Maintain BUY with a revised target price of Rs18,435/share (earlier: Rs19,314/share).

- Margin boosted by lower costs: Revenue growth remained flat during the quarter as the company witnessed pressure on some therapeutic areas due to the nationwide lockdown on account of COVID-19. However, company controlled its costs that boosted margins. Gross cost declined 4.5% YoY boosting gross margin by 260bps. This was driven by product mix and efficient inventory management. While employee cost rose 2.2% and 30bps YoY; S,G&A expenses declined 9.7% and 120bps YoY with decline in marketing and travelling expenses due to lockdown. Overall, EBITDA margin expanded 340bps YoY (+90bps QoQ) to 22.8%.

- Key products performance: As per AIOCD data the AIL has reported a decline of 4.0% in its key products while the Novo has reported a decline of 2.0%. Udiliv, Duphalac, Vertin, Cremaffin Plus and Digene have reported YoY growth of 5.1%, 6.3%, 10.4%, 12.3% and 22.4% respectively for the quarter. Duphaston reported a steep decline of 32.8% YoY. Thyronorm, Cremaffin and Claribid reported a YoY decline of 3.0%, 10.1% and 10.6% respectively. Amongst the Novo portfolio, Actrapid and Tresiba have reported strong YoY growth of 27.6% and 20.5% respectively. Mixtard, Novomix and Ryzodeg have reported a YoY decline of 6.7%, 5.0% and 15.3% respectively whereas Novorapid and Victoza have remained flattish.

- Outlook: Focus on digital marketing and operating leverage in core portfolio would drive margin improvement of 500bps and result in 18.8% earnings CAGR over FY20-FY23E. While some of these cost savings would be sustainable over long term we expect EBITDA margin to remain stable at ~22-23% over the medium term. Minimal capex requirement would help generate healthy free cashflow of ~Rs28bn over FY21E-FY23E.

- Valuations and risks: We reduce our sales and earnings estimates by 2-3% and 2-4% respectively for FY21E-FY23E to reflect current quarter's performance and lower other income. Maintain BUY with a revised target price of Rs18,435/share based on 42xSep'22E EPS (earlier: Rs19,314/share). Key downside risks are: addition of key drugs in NLEM, product concentration, government intervention, and presence of unlisted promoter company.

Shares of ABBOTT INDIA LTD. was last trading in BSE at Rs.15255 as compared to the previous close of Rs. 15590.4. The total number of shares traded during the day was 439 in over 260 trades.

The stock hit an intraday high of Rs. 15531.95 and intraday low of 15251. The net turnover during the day was Rs. 6742424.

Source : Equity Bulls

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