FY20 performance reflects strength of power brands…
While Q4FY20 results were subdued as the nationwide lockdown marginally impacted availability of raw materials, finished goods and supply chain distribution, overall FY20 revenues grew 11.3% YoY to Rs. 4093.1 crore, mainly due to strong growth in key therapies & power brands. EBITDA margins improved 204 bps YoY to 18.5% mainly due to better operational leverage. EBITDA grew 25.1% YoY to Rs. 756.4 crore. PAT grew 31.7% YoY to Rs. 592.9 crore. Delta vis-à-vis EBITDA was mainly due to lower tax rate.
“Power brands” continue to grow ahead of industry growth
Abbott India is one of the fastest growing listed MNC pharma companies. It has outperformed the industry on a consistent basis in women’s health, GI, metabolic, pain, CNS, vaccines. The company’s top 10 brands including (Duphaston- gynaecological, Thyronorm – thyroid, Udiliv, Vertin, Duphalac– GI) together posted ~18% revenue CAGR in March 2015-20 (MAT basis). This has led their combined contribution in total revenues to grow from 37% in March 2015 to ~47% in March 2020. Thus, it is evident that revenue growth has been driven by top brands (power brands). Apart from this, continuous new launches and line extension in existing and new segments is also driving growth. We expect future launches of new products from its key divisions, along with brand extensions and access to innovative molecules from global parent to drive growth.
Margin improvement with better return ratios
Abbott India is a debt-free company and has seen its core RoEs improving from 72% in FY14 to 216% in FY20. EBITDA margins recovered from lows of 11.8% in FY14 (due to inclusion of one its top brand (Thyronorm) under price control) to 18.5% in FY20. The core margins of the company could have been even better after excluding marketing margins (related to Novo Nordisk diabetic portfolio). Apart from this, the recent tax amendments have had the effect of reducing its tax rate from 36% in FY19 to 25-26% from FY20 onwards. Continued new product launches, volume led growth in Abbott India’s top brands and intermittent price hikes in its portfolio provide comfort on overall financials. The company has also declared a Rs. 250 dividend (final: Rs. 107 + special: Rs. 143) per share for FY20.
Valuation & Outlook
Covid-19 related disturbances notwithstanding (likely to impact Q1FY21), companies from the pharma MNC staple like Abbott continue to generate investor’s interest with robust and sustainable business model backed by stable growth, debt-free B/S, favourable market dynamics with doctor prescription stickiness and lower perceived risk factors. We continue to believe in Abbott’s strong growth track in power brands and capability of new launches on a fairly consistent basis (+100 launches in the last 10 years). We upgrade the stock from HOLD to BUY and arrive at a target price of Rs. 19030 based on 45x FY22 EPS of Rs. 422.8.
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