Strong growth rates expected to drive Abbott India's outperformance

New launches, power brands, digital initiatives to keep it ahead of peers

Since its August lows, the Abbott India stock has been on an upswing gaining about 21 per cent on steady June quarter results, brokerage upgrades and expectations of double digit growth going ahead. The momentum for the stock, which hit its all-time high on Tuesday, is expected to continue given the robust sales posted in August.

For the three months ended August, the company outperformed the pharma market with a growth of 22 per cent as compared to 15 per cent growth for the broader market. Barring the vitamins, minerals and nutrition segment which saw a drop in sales, other therapies reported an uptick. Growth was led by larger categories of anti-diabetic and gastrointestinal therapies and the trend of key brands growing faster than the market is expected to continue.

Abdulkader Puranwala of Anand Rathi Research expects the pharma market to grow in mid-teens going ahead, in line with its past average. He expects chronic therapies to outstrip acute therapies in the long run as emerging lifestyle diseases boost demand for such drugs. He prefers companies with strong chronic therapy ranges and has a positive view on Abbott India. Eight out of the company’s top ten brands are in the chronic/sub-chronic segments. Most analysts expect the company to post double digit growth rates and outperform the pharma market by 200-300 basis points.

Highlighting key triggers for the stock, analysts at ICICI Securities believe future launches from key divisions, along with brand extensions and access to innovative molecules from global parent will drive growth. Further, its strong growth track in power brands and capability in new launches on a fairly consistent basis (+100 launches in the last 10 years) would be another factor that should help it maintain growth, they add. The company launched 15 products in FY21 and is expected to match last year’s run rate in the current financial year as well.

While the company grew its revenues at 10.5 per cent over the FY16-21 period, analysts expect growth to be at 13 per cent over the next couple of years led by new introductions as well as price hikes. In addition to top line growth, a focused drive to improve operational efficiencies, cost reduction, and positive product mix would result in margin improvement, according to  Cyndrella Carvalho of Centrum Research. Higher proportion of brands as compared to its insulin portfolio (trading business) should aid profitability. Margins are expected to increase by 300 basis points to 24.3 per cent by FY23 from current levels.

Though a debt free balance sheet, the highest return ratios in the domestic pharma sector, strong growth rates and digital initiatives are positive, the stock after the recent rally is available at 45 times its FY23 earnings estimates. This is at a premium to its five-year average and makes it the most expensive among large cap pharma names. Investors can look at the company on dips for a medium to long term holding period.