Company Name – Abbott India Limited (Abbott) Current Share Price – INR 20,211 (February 28, 2023) Market Cap – INR 42,888 cr |
1. What is interesting about the stock?
Pharmaceutical companies are important to society because they research, develop, and bring new medicines that improve health and quality of life for patients around the world. Multinational pharmaceutical companies (MNCs) are known for their high-quality products and advanced research and development capabilities. This often results in a premium on their stock prices compared to domestic pharmaceutical companies. Additionally, MNCs have a global presence and are often seen as more stable and reliable investments. One such company is Abbott India Limited.
Abbott India Ltd, a subsidiary of Abbott Laboratories, USA, is engaged in the manufacture and marketing of pharmaceutical products. It offers high-quality trusted medicines across multiple therapeutic categories including Women's Health, Gastroenterology, Neurology, Thyroid, Diabetes, Pain Management, General Care, Vitamins, and Vaccines.
Abbott has a strong portfolio of 140+ brands for healthcare professionals with a strong distribution network of over 8,500 stockists and more than 175,000 retailers. The Company also has a field force of 2,500+ medical representatives for better engagement with doctors and patients through technology-led innovative solutions. It owns and operates only 1 manufacturing plant in Goa. Apart from India, the Company also serves Sri Lanka, Nepal, Maldives, and Bhutan.
Sector outlook
The domestic pharmaceutical market is highly fragmented with the top 10 companies making up 43% of the share, and the top 150 companies accounting for 96% of the share. Local players enjoy a dominant position, occupying 4 of the top 5 positions.
India is often referred to as the “pharmacy of the world”, ranking 3rd worldwide in total pharmaceutical production volume and 10th by value. As per National Indian Promotion Agency, it is the largest producer of generic medicines and vaccines, occupying 20% volume share in generics and 62% in vaccines.
Business strategy
Abbott’s strategy of ‘Going Digital’ and ‘Services beyond the pill’ is the key differentiator and game changer for the company. Abbott India’s continuous endeavor to move from awareness to compliance to lifestyle modification has resulted in its success in the industry. The Company has set the focus for upcoming years in the following areas:
Delivering market-beating growth
Shaping therapies
Expansion into new therapies via new launches
Building the next set of 10 brands
Going Digital
Services beyond the pill
Abbott’s Brands business has outpaced the industry growth which is significantly driven by the launch of new products and affordable medicines as well as the company’s direct touch with consumers (programs launched). Its therapy-leading products (Brands) and Insulin products comprise 65% and 35% of overall revenues, respectively. Additionally, the company has signed an agreement with Novo-Nordisk to market insulin products in the domestic market.
The Brands business has posted EBITDA margins of 26%-27% - at par with multinational pharmaceutical companies - and its Insulin business (trading business) posted 5% EBITDA margins. Therefore, the increase of the Brands business’ proportion in overall revenues can increase margins by 100 bps over the next 3 years.
Why invest in Abbott India?
Strong brand: Abbott India is a subsidiary of Abbott Laboratories, a global healthcare company with a strong brand reputation. This association has helped to establish Abbott India as a reliable and trusted brand in the Indian healthcare market.
Diversified product portfolio: The product portfolio provides a broad range of options to meet the needs of different segments of the population.
Research and development: Abbott India invests significantly in research and development to develop innovative products that address unmet medical needs. This focus on R&D has helped the company to develop new products and expand its product portfolio.
Strong distribution network: Abbott India has a well-established distribution network in India, with over 8,500 stockists and more than 175,000 retailers. This network enables the company to reach a large customer base and distribute its products efficiently.
High-quality products: Abbott India is known for its high-quality products, which are manufactured to global standards. The company has a strong quality control process that ensures its products are safe and effective.
2. Key Historical Financials
Company revenue and profit have been growing 11% and 24% on a CAGR basis respectively in the last 5 years
Revenue increased by 14% in FY22 and 8% in Q3FY23 on a YoY basis
EBITDA margin has increased from 18% in FY20 to 22% in FY22 and 24% in Q3FY23
Working capital days decreased from 14 in FY20 to -4 in FY22 leading to a healthy cash conversion (CFO/EBITDA) ratio
Cash balance as of September 30, 2022, was ~ INR 2,750 cr
Abbott has high ROCE and ROE of 38% and 29% respectively in FY22
3. What is my view on company valuation?
The Company is trading at a P/E of ~47x as against the median P/E (5-year) of 36x. The sectoral median is also ~33x currently.
Abbott Laboratories Inc trade at a P/E ratio of ~20x.
With expected revenue and profit growth of 10-15% in the next few years, the valuation looks expensive. However, the stock will always trade at a premium to the sector because it has a better brand basket than other players and also because it is an MNC subsidiary.
Apart from the reasons mentioned earlier, the MNCs also trade at a premium in the Indian stock market due to the better governance practices as they are often required to follow strict governance practices, which are mandated by the regulations of their home country. These regulations help to ensure transparency and accountability, which is important to investors.
4. What are the risks to the investment analysis?
Risks to the analysis are:
Increase in raw material prices due to supply chain disruptions at the global level can impact margins and reduce profitability if the increased prices aren’t passed on to the customers
Entry of more products in the National List of Essential Medicine category (at present 24% of the portfolio under NELM). This tends to lower the selling price of the drug
Any increase in royalty by the parent company will impact the profitability of the Company. Royalty is currently at 0.5% of sales
About the Author
I have over 18 years of experience in private equity and public markets. I am an engineer by background and MBA from a premier institute in India.
Disclosure
I have no stock, option, or similar derivative position in any of the companies mentioned in the last 30 days, and shall not initiate any such positions within the next 5 days. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from SocInvest). I have no business relationship with any company whose stock is mentioned in this article.
I am not a SEBI registered advisor. This article is purely for educational purposes and is not to be construed as investment advice. Please consult your financial advisor before acting on it.
I have used publicly available information while writing this article.