Abbott India: MNC pharma play on increased consumer spending

(KrishnaA) #21

Abbott has seen OPM expansion every few years. Sudden spurt in profitability is due to increase in margins. Is this margins sustainable and they can further expand? Any one closely tracking can provide mgmt commentary or insights. Else stock may see time correction in a band with 10-15% return for next couple of years till any new trigger for margin expansion.Similar pattern is seen from 2014-2017 when 10-12% of growth in Net profits ,followed by sudden spurt in 2018 due to margin expansion. Also significant increase is seen in “Other income” in 2018 and current fiscal.Any one aware from where it has come and will remain sustainable in future.

(1.5cr) #22

On your query on other income jump:

Mgmt. Plans to launch a large number of new products going forward. This can be found in their commentary/interviews.

I think 15% OPM is a fair assumption on average.

The business has a very high ROCE and pays out around 30% as a dividends on average so the company should be able to reinvest bulk of its earnings at a high return.

I dont know about any triggers on the margin expansion, however the company has grown its sales by atleast 10% each and every year for the last 10 years. (not cagr but every single year). That is definately something quite impressive.

Thematically Indians will consume more quality or “branded medication” as income rises and consumption increases. They dont have any overseas exposure, it is more of a branded consumer kind of a business, difference being that they sell pharma/healthcare products. So broadly in the long run they should grow well and throw out quite a bit of free-cash.

I think they should continue to grow in a stable manner. They are market leaders in quite a few of their segments and the business has great metrics, akin to an FMCG business. I do not know about the next 2 years share price but if you have a 3-4 year plus view I think you could see 15%+cagr incl. dividends.

Median PE for the last 8 years has been around 35x. Companies with an “FMCG” nature and strong brands with such return metrics coupled with a MNC parentage might never trade cheap per se. That is something only each individual can take a call on.

Risks are that the govt can put price caps etc: but that is very hard to do in India. There is no quality control over generics. A doctor cannot prescribe a generic drug to a patient because the doctor will be unsure about the quality checks that the govt has put into place, if any at all. Atleast reputed pharma companies have some quality regulation as they are indeed worried about their brands. This is because they can command a premium due to their brand and are hence incentivised to invest in quality control. If the industry is commoditised there is no incentive to invest in quality and everyone will look to drive down costs. In India this proposal may not be feasible from an employment point of view and a health point of view. So that risk will be an overhang but I think that is all it will be.

Another concern is the parent has an unlisted entity but this has not hampered the performance of the listed entity or its shareholder wealth creation.

They also have a cash balance that has been increasing quite rapidly over the years. The promoter owns close to 75% as it is. This build up of cash and high promoter holding could make them a delisting candidate.