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Weak performance; margins stable

Abbott India Limited’s (AIL) Q3FY21 performance was muted and lower than our estimates. Revenue grew 1.6% YoY to Rs10.9bn (I-Sec: Rs11.5bn), EBITDA margin remained flat at 22.1% (I-Sec: 22.7%) and adj. PAT declined 5.1% YoY to Rs1.8bn (I-Sec: Rs2.0bn). The muted performance was due to slowdown in key products due to the challenging environment. Near term pressures continue but recovery is on the cards with easing of lockdown. We remain positive on the company considering its exposure exclusively in domestic formulations, strong balance sheet with deep cash reserves, high return ratios and strong brand equity built over the years. Maintain BUY with a revised target price of Rs18,195/share.

* Low costs support margins: Revenue growth remained muted at 1.2% YoY during the quarter. This is largely due to challenging environment in key products, especially Duphaston which has declined 27.5% YoY. However, company has kept its costs in check supporting margins. Gross cost remained flat YoY boosting gross margin by 80bps. Similarly, employee cost also remained flat YoY supporting margins. However, S,G&A expenses grew 10.6% YoY and 15.9% QoQ with reversal of some cost savings which were implemented due to the nationwide lockdown. This rise in S,G&A expenses neutralized the gross margins resulting in flattish EBITDA margins. Other income declined sharply by 45.9% YoY and 32.0% QoQ resulting in a 5.1% decline in adj. PAT.

* Key products performance: As per AIOCD data the AIL has reported a growth of 1.2% in its key products and the Novo has reported a growth of 4.4%. Thyronorm, Udiliv, Duphalac, Vertin, Cremaffin Plus and Digene have reported YoY growth of 5.6%, 14.8%, 2.8%, 17.9%, 34.5% and 9.9% respectively for the quarter. Duphaston reported a steep decline of 27.5% YoY. Cremaffin and Claribid reported a YoY decline of 7.5% and 16.2% respectively. Amongst the Novo portfolio, Actrapid and Tresiba have reported strong YoY growth of 34.3% and 25.7% respectively. Novomix and Novorapod have reported a YoY growth of 6.8% and 7.6% respectively. Mixtard and Victoza have remained flattish while Ryzodeg has declined 15.4% YoY.

* Outlook: Focus on digital marketing and operating leverage in core portfolio would drive margin improvement of 400bps and result in 15.8% earnings CAGR over FY20- FY23E. While some of these cost savings would be sustainable over long term we expect EBITDA margin to remain stable at ~21-22% over the medium term. Minimal capex requirement would help generate healthy FCF of Rs26bn over FY21E-FY23E.

* Valuations and risks: We reduce our sales and earnings estimates by 2-3% and 6- 8% respectively for FY21E-FY23E to reflect current quarter’s performance and lower other income. Maintain BUY with a revised target price of Rs18,195/share based on 42xFY23E EPS (earlier: Rs18,435/share). Key downside risks are: addition of key drugs in NLEM, product concentration, government intervention, and presence of unlisted promoter company

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