Abbott India Ltd: Valuing a Cash Machine

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Public polls are underutilized tools, Do you agree? Nevertheless, I conducted the following poll over Youtube:

Abbott India Ltd Youtube Poll

Over 68 people voted and I got my answer :

Abbott India Ltd Youtube Poll
Abbott India Ltd Youtube Poll

The public interest in Abbott India Ltd (AIL) is commendable.

Here goes my video capturing the fundamentals including the valuation of this stock:

Watch: Valuation of Abbott India

Let us analyze the fundamentals of the stock:

Background of Abbott India Ltd

Founded in 1888 by an American physician Dr. Wallace Abbott, the business reached Indian shores in 1910. In 1944, AIL was incorporated.

In India, Abbott operates through 2 companies:

Abbott India Ltd

Put together, Abbott captured 6% market share in Indian Pharmaceuticals Market (IPM) which is second only to Sun Pharma.

A brief overview of Abbott in India is here

Abbott India Ltd and Abbott Healthcare Ltd

AHPL is a prominent name in Nutraceuticals & Anti Infectives with brands such as Ensure, Pediasure & Similac

Business Model of AIL

Revenue Mix of Abbott India Ltd
Revenue Mix

The traded portion is generated from the sale of Anti Diabetic medicines of Novo Nordisk.

AIL had entered into a distribution agreement with Novo Nordisk India Pvt Ltd for the sale and distribution of their insulin products in India in 2005.

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Since then, this partnership continued to date and shall remain so till 2022 and expected to get renewed going ahead.

In this segment, AIL generates a 5% EBITDA margin.

Abbott India Ltd operates in both acute and lifestyle therapies.

Read: Top 4 Pharma Stock Comparison

Segment-wise Break-up of AIL

Abbott India Ltd - Segment wise Breakup

Highlights of Key Segments

Gastrointestinal: AIL is one of the largest companies in India’s Gastro therapy, second only to Sun Pharma.

Gastro contributes ~25% to sales, and AIL has ~7% share in the Rs 137bn market. In total, it has 57 brands in this category, with 15 brands in the number one position.

Key brands include Udiliv, Duphalac, Cremaffin, Cremaffin Plus, and Digene.

Women Health: AIL has 2 key products serving these segments with a market leadership position.

Thyronorm is used for treating Hypothyroidism while Duphaston is the remedy for women’s infertility problems including miscarriage. AIL faces competition in Thyronorm.

However, BOOT’s strong branding provides an edge over GSK’s Eltroxin and other smaller brands, retaining 50%+ market share.

CNS/Neuro: It contributes 11% of sales with Vertin a prominent treatment of Vertigo and Prothiaden as a depression cure.

Vaccines: AIL entered the lucrative, high-margin vaccines segment of India in 2014-15. This segment accounts for 4% of the total top-line.

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It has launched Influvac from its parent’s portfolio, which commands a 63% market share in influenza vaccines.

Additionally, AIL has a licensing agreement with Hyderabad-based Bharat Biotech to market 4 vaccines in the immunology segment.

The Parent Co, Abbott Labs US, acquired Belgium- based Solvay in 2010. The key brands for AIL include Duphaston, Udiliv, Vertin, Duphalac, Creon.

AIL’s Brands business has outpaced the industry growth driven by the launch of new products and affordable medicines as well as by the company’s direct touch programs.

Their key power brands are growing at a healthy CAGR of 10-20% during the last 5 years.

Financial Analysis

Let us have a quick look at the top line & bottom line:

Topline CAGR is @12% while PAT grown @21%
Topline CAGR is @12% while PAT has grown @21%

The company has been a cash machine with a strong generation of Free Cash Flow as shown below:

FCF CAGR of Abbott India Ltd is 27%
FCF CAGR of Abbott India Ltd is 27%

The Company is virtually debt-free.

Valuation

With nearly 50 PE and Rs 33000 cr market cap, the company looks fairly priced. However, to arrive at a decision point, we use a tool called “Reverse DCF”.

Here goes our summary:

Valuation of Abbott India Ltd
Valuation of Abbott India Ltd

The Bottomline is :

Mr market has priced in 22% of annual growth for the next 10 years for this stock’s Free Cash Flow. Against which the company has been able to grow its FCF by 27%.

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So the most important point here is: If you think that AIL can grow its profit/FCF by more than 22% then the stock is available at discount otherwise search elsewhere as there are many other fishes in the pond.


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Amitabh Vatsya

Amitabh Vatsya

Amitabh Vatsya is an active Investment Vlogger (http://youtube.com/c/Sadhansimplified) | Loves to share his ideas at http://wealthsutra.wordpress.com | Follow him @amitabhvatsya
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