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Abbott India: Hold

Nath Balakrishnan

SHAREHOLDERS can retain their holdings in the Abbott India stock, which trades at about Rs 625. Abbott is one of the leading players in the anti-diabetic therapeutic area (insulin), for which it has an arrangement with Novo Nordisk; it is also present in other therapy areas such as analgesics, gastroenterology and anti-epilepsy, in which it has well-known brands such as Brufen, Digene and Eptoin.

For its latest quarter ended May 2005, Abbott recorded a 35 per cent drop in earnings at Rs 15 crore compared to the corresponding previous period. Though there was a 11 per cent growth in sales for the quarter at Rs 113.8 crore, driven by a pick up in offtake, post the implementation of the VAT regime, Abbott has been impacted negativelyby the transition to levying excise on MRP.

Further, with lower margins in trading — finished goods purchases, as a percentage of sales, is higher by about 300 basis points in the just-ended quarter — and a steep fall in the `other income', pre-tax profit was 33 per cent lower at Rs 21.2 crore.

Business outlook

Abbott derives a chunk of its revenues from the insulin segment, for which it has an arrangement with Novo Nordisk. The arrangement has was recently extended up to December 2006; an inability to continue the arrangement thereafter would, hence, be a key risk.

Competition in the insulin segment is hotting up, with companies such as Biocon and Wockhardt having thrown their hats into the rings. Adoption of aggressive pricing tactics to gain a toehold in the market could erode Abbott's profitability.

In the analgesics space, given the current issues surrounding the COX range of pain inhibitors, a switch to more mature brands such as Brufen cannot also be ruled out. Abbott should also be a beneficiary, should there be a reduction in the span of drugs under price control.

A presence in therapeutic areas such as anaesthetics and anti-epileptics gives Abbott the opportunity to participate in spaces that offer both better growth prospects and realisations. Under the new patent dispensation, Abbott may also decide to tap into the portfolio of its parent for launch in India, though it would take some time for such products to contribute in a meaningful manner to the bottomline.

Valuation

Abbott trades at 14 times its expected per share earnings for the fiscal in progress. This is at the lower end of the band compared to peers such as GlaxoSmithKline Pharma, Aventis Pharma and Pfizer. Abbott's return on shareholder funds for the year-ended November 2004 stood at a healthy 54 per cent.

Abbott has also paid out a dividend of Rs 35 per share for each of its last two financial years. The dividend yield of about 6 per cent should mitigate downside risk.

The company had put through a buyback programme a couple of years back at Rs 350 per share; in the absence of suitable opportunities for inorganic growth, measures to return surplus cash (in excess of Rs 200 crore as of end-November 2004) to shareholders would be another positive. Remain invested.

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