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Strong quarter, high dividend

Abbott India Limited’s (AIL) Q4FY22 performance was above our estimates across all fronts. Revenue grew 14.6% YoY to Rs12.6bn (I-sec: Rs11.6bn). EBITDA margin expanded 460bps YoY at 23.4% led by higher gross margin and lower expenses. Adjusted PAT grew 38.7% YoY to Rs2.1bn (I-Sec: Rs1.8bn). Growth during the quarter was led by traction in key products. Declining covid cases have paved the way for normalised environment; however, near-term growth could be limited due to high base and high competition in key products. Although gross margin remains healthy, increase in ground-level expenses will keep margins in check in near term. We remain positive on the company given its exposure exclusively in domestic formulations, strong balance sheet with deep cash reserves, healthy return ratios and strong brand equity built over the years. Maintain ADD with a revised target price of Rs18,631/share. (Prior: Rs19,156/share)

* Result review: Revenue grew 14.6% YoY led by traction in key brands. Despite the surge in covid cases (third wave) during the early part of Q4FY22 (Jan-Feb, ’22), AIL has outperformed the industry growth. Gross margin improved 140bps YoY with improved product mix as core portfolio has reported stronger growth compared to Novo portfolio. EBITDA margin improved YoY at 23.4% led by higher gross margin and lower SG&A spend. We expect EBITDA margin to remain in the vicinity of 21- 22% over FY23E-FY24E. Near term cost pressures and increase in ground-level expenses are likely to offset operational efficiency and improvement in the product mix. Adjusted PAT grew 38.7% YoY, in-line with operational performance. AIL announced total dividend of Rs275/share including a special dividend of Rs130/share.

* Performance of key products: As per IQVIA data, AIL has reported a YoY growth of 9.8% while the anti-diabetic (Novo Nordisk) portfolio grew 5.2% YoY. Udiliv, Digene and Duphalac reported YoY growth of 21.1%, 19.9% and 18.7%, respectively for the quarter. Duphaston saw a decline of 14.4% YoY. In the Novo Nordisk portfolio, Ryzodeg grew 29.9%, while Novorapid, Novomix and Mixtard grew 4.3%,2.6% and 2.3%, respectively. Actrapid reported a decline of 8.8%.

* Outlook: We believe rising cost pressures in near term, with increasing field activity, would keep margins in check. Thus, we expect EBITDA margin to remain in the vicinity of 21-22% for FY23E-FY24E, despite improving operational efficiency and product mix. Overall, we expect 7.4% revenue and 11.3% PAT CAGRs over FY22- FY24E. Limited capex requirement would help generate healthy FCF of ~Rs20bn over FY23E-FY24E, which could be used to reward shareholders with high dividend.

* Valuations and risks: We cut our EPS estimates by 6-8% to factor in rising costs and lower other income. Maintain ADD with a revised target price of Rs18,631/share based on 40xFY24E EPS (earlier: Rs19,156/share based on 40xSep’23E EPS). Key downside risks: Addition of key drugs in NLEM and government intervention

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