Wednesday, May 28, 2008

Stock Idea - Abbott India

CMP - 540.6
Sensex - 16525
Abbott India is the subsidiary of Abbott Laboratories which is a century old company with operations across 130 countries. Abbott in India has a strong brand equity and has a network of 18 distribution points, which cater to 11,000 stockists and 70,000 retailers.

Abbott India’s product portfolio in India covers

1. Primary Care, which markets products in the areas of Pain Management, Gastroenterology, with well-known brands like Brufen, Digene, Cremaffin.
2. Specialty Care – Metaboloics & Urology provides solutions in the areas of Thyroid, Obesity, Diabetes and Benign Prostratic Hyperplasia.
3. Specialty Care - Neuroscience has a varied portfolio, with specialty products in the Neurology and Psychiatric segments.
4. Hospital Care, offers products in the field of anesthesiology and neonatology namely Forane, Sevorane and Survanta.


Let me start the discussion with assumption that I am going and buying this business out. The current equity base of the company is about 14.47 crores. At the current market price of Rs 540 the company has a market cap of Rs 826 crores.

The company had approx Rs 167 crores as of Nov 07 ( FY 2007) of cash lying on its balance sheet.

So we are buying the business for about Rs 659 crores. The business did a topline of about Rs 620 crores for FY 07. The company has increased topline from Rs 459 crores in FY 2005 to current Rs 620 crores in 07 on a net block which has gone up marginally from 31 crores to 36 crores.

Net profit has increased from 59 crores to 68 crores but more imp EPS has increased at a faster pace from 38.72 to 46.43 in the same period due to reduction in share capital from 15.3 crores to 14.5 crores.

The business generated a bottomline of approx Rs 51 crores from operations excluding the other income generated on the investment portfolio so is available on a PE of 10.9 on current years earnings.

Management Philosophy

The parent Abbott limited has a track record of increasing dividends for 35 consecutive years. The parent spent > $ 1 billion is share repurchases worldwide in 2007 and has plans to increase that to $ 2.5 billion worldwide. It generates about $ 4 billion of operating cashflows every year. The presentations available on the parents website will give you a flavour of the same.

The Indian company paid a dividend of 17.5 % dividend for the FY 2007 and hence provides a dividend yield of 3.2 %. The company carried out a share buyback of 5 % of the companys capital at Rs 650 per share through the year and has filed for buyback of a additional 5% of the company at Rs 650 per share which should happen in the first half of calendar FY 08.

Investment Rationale.

Beyond the stable earnings growth which is defensive in nature and not subject to economic cycles, good ROCE etc what is it that interests me in the stock ?

There are other MNC pharma companies like Pfizer, Merck etc which deliver similar numbers and are sitting with cash on their balance sheet and have a strong product portfolio. So why Abbott ?

I believe the key challenge for a value investor is not finding out companies that have cash on their balance sheet and are cheaply available. It is in finding out what the management would do with that cash. In India where shareholder activism is non existent or at a very nascent stage, it is imp to have managements that use that cash judiciously.

I like Abbott on that variable where it derives its philosophy from its parent. The management consistently maintains a high dividend payout ratio and utilises cash for share buybacks. The public shareholding is about 34% so effectively 1/7th of your portfolio in Abbott will deliver 20% assured return this year as the company finsishes it 5% share buyback program.

The stock wont be multi bagger but I believe that one wont lose money on this one.

Disclaimer - I m not recommending buying the stock based on my statements. Kindly do u r own analysis to reach that conclusion.


Rohit Chauhan said...

Hi ninad
as you rightly point out in your post, merck, novartis, and other MNC pharma are selling at rock bottom prices too.

Other than market apathy , i think there are three main causes for the poor valuations
- as you said plans for cash which for some of these companies is none plan. just sit on the cash ..thats it
- low to non existent growth
- poor governance ..some of these companies have indian subs and the parents tend to favor the indian subs over these publicly listed companies ..not sure of abbott on this count

i think you are right in saying that there is very low downside ..upside is however diffcult to figure out


Ninad Kunder said...

Hi Rohit

The stock gives a dividend yeild of 3.24%
The buyback offer will be at 650 giving a 20% return on current stock price of 540. Assuming 1/7th of the outstanding stock gets bought back we have a return of 2.91 % on the entire holding.

So effectively 6.15% post tax virtually assured return this year. That is akin to fixed income instrument.

Q1 sales were up 10.33%, profits 9.3% but EPS was up 15.88% bcos of the share buyback last year. So we have a PEG of less than 1. It will improve next year post this buyback.

There are positives triggers like the company working towards expanding cap utilsiation at Goa plant by reducing outsourcing, building a dedicated sales team to service corporate hospitals, potential complete buyback offer etc but i m not factoring all those in.

I start with premise of not losing money and then wait for the positive triggers to fall in place :-).