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In-line revenues; beat on margins

Abbott India Limited’s (AIL) Q3FY22 performance was above our estimates on profitability front due to better-than-expected margins, while revenues (up 11.8% YoY to Rs12.2bn) were almost coincided with our estimate of Rs12.1bn. EBITDA margin was flat YoY at 22.0% though it was better than our estimate of 21.0%. Adj. PAT grew 12.5% YoY to Rs2bn (I-Sec: Rs1.8bn). Growth during the quarter was led by traction in key products and low base. We believe increase in ground-level expenses will keep margins in check in the 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. Recent correction in the stock price has made valuations reasonable, hence we upgrade it to ADD (from Hold) with a revised target price of Rs19,156/share

Business review:

Revenue increase of 11.8% YoY was due to traction in key products. Amid waning covid cases, recovery in growth continued in tandem with the industry. Gross margins improved 170bps and 40bps YoY and QoQ led by better product mix. However, EBITDA margin was flat YoY at 22% due to higher SG&A expenses due to increased ground-level activity. We expect EBITDA margin to remain in vicinity of 22-23%. Near-term cost pressures and increase in ground-level expenses are likely to offset operational efficiency and improvement in the product mix. Adj. PAT grew 12.5% YoY, in line with operational performance.

Performance of key products:

As per IQVIA data, AIL has reported a YoY growth of 9.5% while the anti-diabetic (Novo Nordisk) portfolio grew 2.5%. Thyronorm, Udiliv, Duphalac, Vertin, Cremaffin plus and Digene reported YoY growth of 11.3%, 32.2%, 10.9%, 15.2%, 22.9% and 8.8% respectively for the quarter. Duphaston saw a decline of 2.9% YoY. In the Novo Nordisk portfolio, Ryzodeg, Novorapid and Tresiba reported YoY growth of 38.5%, 7.8% and 9.8% respectively. Mixtard and Actrapid reported decline of 4.7% and 9.1% respectively.

Outlook:

We believe rising cost pressures in the near term, with field activity, would keep margins in check. Thus we expect EBITDA margin to remain in the vicinity of 22-23% despite improving operational efficiency and change in product mix. Overall, we expect 9.6% revenue and 16% PAT CAGR over FY21-FY24E. Capex requirement to help generate healthy FCF of ~Rs22bn over FY23E-FY24E, would be minimal.

Valuations and risks:.

We marginally tweak our projections to factor-in the Q3FY22 performance. Considering the recent correction in stock price, current valuations seem reasonable, hence we upgrade it to ADD (from Hold) with a revised target price of Rs19,156/share based on 40x Sep’23E EPS (earlier: Rs18,971/share based on 42x FY23E EPS). Key downside risks: addition of key drugs in NLEM, government intervention, and presence of unlisted promoter company.

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