Abbott India Has Beaten Three Bear Markets

Among the companies with a market capitalisation of at least Rs 1,000 crore, the Indian unit of the U.S.-based Abbott Laboratories Ltd. is the only one to return gains in each of the last three bear phases—when the market fell at least 20%—in 2010-11, 2015-16, and January-March 2020.

So far this fiscal, the stock has returned 20.1% gains compared with a 0.1% gain in the S&P BSE Sensex. It, however, lagged the 46.9% year-to-date jump in the S&P BSE Healthcare Index.

What Works For Abbott India

Domestic Focus

Most India drugmakers with U.S. exposure were either affected by regulatory scrutiny or competition in generic prices in the last few years. During bear phases, these companies suffered because of a decline in exports. Abbott India, however, outperformed because of its limited exposure to the export markets and growth of the domestic formulation business. The company, according to its annual report, generates less than 1% of sales from exports.

Abbott India offers a broad portfolio of MNC-branded products in multiple therapy areas like women’s health, gastroenterology, consumer care, central nervous system, metabolics, general care and vaccines.

Growing Portfolio

All its product portfolios grew in 2019-20, with women health, metabolic, and vaccines growing more than 20% year on year, according to last disclosures. The company launched five new drugs in women's health, 12 in gastroenterology, two in consumer health, and one product each in the central nervous system and vaccines.

And it gets support from its parent for new branded launches. In 2019-20, according to the annual report, the company pioneered initiatives in therapies such as vertigo, liver, thyroid, and influenza.

Increasing Demand

According to Abbott’s annual report, demand for pharmaceutical products for long-term treatments is likely to increase due to the world’s growing and ageing population. Global medicine spending, it said, is expected to increase by 2-5% annually and will exceed $1.1 trillion in 2024, driven by increased medicine usage stemming from lifestyle practices and greater access to healthcare.

In India, the company expects medicine spending is projected to grow by 9-12% over the next five years, joining the group of nations spending the most on drugs. This will be aided by the influx of first-time patients from the National Health Protection Scheme, relaxation of regulations for patented drugs, and increasing spend on preventive healthcare.

To be sure, the Indian pharma market has seen sales declined 3.7% between April and August because of the pandemic disrupted several healthcare services, according to ICICI Securities.

Growing Business

• Abbott India’s revenue and net profit grew at an annualised rate of 7.2% and 20.9%, respectively, in the last five years.
• Operating and profit margin average 17.8% and 11.3% in the past five years.
• It is a regular dividend payer with a current dividend yield of 1.6%. That compares with the BSE Sensex and BSE Healthcare’s 1.02% and 0.74%, respectively.

The company has maintained an average return on capital employed of more than 20% in the last 5 years. In 2019-20, the RoCE was 26.7% compared to the industry average of 16.7%.

Management Confident

The company, in its annual report for FY20, attributed its consistent growth to innovation, wider geographical reach and commercial expertise, differentiated marketing and its spending on R&D. In 2019-20, the company conducted 12 clinical studies, created 16 publications, and launched 21 new products. In 2018-19, the company had launched 16 new products.

In response to emailed queries, the company asked BloombergQuint to refer to its annual reports.

Premium Valuations

Abbott India trades at 39.5 times its estimated earnings for 2021-22, compared with 18.6 times and 23.7 times for the Sensex and BSE Healthcare Index.

Out of 12 analysts tracked by Bloomberg, nine recommend a ‘Buy’ on Abbott India, one suggests ‘Hold’, and two have a ‘Sell’ rating. The average of estimates suggests an upside of 6.4% in the next 12 months.

Brokerage View

ICICI Securities

• Expects Abbott India will deliver strong growth across therapies.
• Marquee products, focus on digital marketing and operating leverage in the core portfolio will help generate strong cash flows close to Rs 1,800 crore over FY21 and FY22, pushing return ratios to higher levels.

Axis Securities

• Providing doctors and consumers with services and information to help better health and engaging with patients directly is the key differentiator and game-changer for the company.
• Growth in the branded business will improve the company’s overall profitability.
• The proportion of the branded business is expected to increase to 66% in 2022-23 compared to 63% in 2019-20.
• The company’s R&D expenses are borne by its parent, helping it generate strong free cash flows with minimal capex requirements.

Ashika Stock Broking

• The brokerage said in a June report that the company’s strategy of reducing third-party dependency on manufacturing, healthy dividend payout ratio of 24.9% in the last five years, and its approach to move from awareness to compliance to lifestyle modification are key growth drivers.
• The stock is a much better investment option in the current market volatility given its strong brand, healthy balance sheet and strong pedigree of management.

Risks

• Abbott India, in its annual report, cited strict government regulations, the proposed expansion of drugs under price caps and restrictions on trade margin mark-ups as uncertainties.
• Growing awareness about cheaper alternatives to branded generics and more channels providing such drugs is likely to impact the volume growth.
• ICICI Securities also cited product concentration, apart from price gaps and government intervention, as a risk.