Capital
Market : Abbott
• Abbott
India (AIL) is merging Solvay
• Abbott
India Ltd. provides healthcare solutions through its 4 business units:
– Primary Care
– Pain Management, Gastroenterology, with well-known brands like Brufen, Digene, and Cremaffin.
– Specialty
Care – Metabolic & Urology solutions in Thyroid, Obesity, Diabetes (including
distribution of Novo Nordisk’s Insulin) and Benign Prostatic Hyperplasia.
– Specialty
Care – Neurology (mainly Anti-Epileptic) and Psychiatric segments
– Hospital
Care – Anesthesiology and Neo-natology, viz., Forane, Sevorane and Survanta
• Solvay Pharma India Ltd. focuses
on:
– Women’s
Health (Calcium & Vitamin D deficiencies, Infertility, Gynaecological
disorders, HRT, Pre-term labour management,
– Mental
Health (Depression, Obsessive Compulsive Disorders, Vertigo,
– Gastroenterology
(IBS, Abdominal pain, Constipation (laxative), Intestinal disorders, Pancreatic
insufficiency, Inflammatory Bowel diseases, Cholestatic
Liver diseases,
– ENT (Allergic
Rhinitis, Nasal spray, etc.)
– Vaccines (Influvac – to prevent Influenza) and
– General (Iodine
disorders, Musculoskeletal conditions)
• Thus, both
companies have very complementary product portfolio with very little overlap. At present, teams of Medical Reps(MR’s) ( 1400 of Abbott + 500
of Solvay) are undergoing re-structuring in terms of
re-defined geographies, therapies, doctor coverage etc., to present a unified
face before the outside world. If required, company may add some MR’s to fill the gaps in different pockets. After
strengthening their presence in Tier I and II cities and towns, plans are afoot
for further penetration into smaller markets.
• Both
companies will continue with new product launches even during the intervening
period. At present, there are no plans to launch any new R&D based molecule
from the parent. At least for the next couple of years, company will have new
launches in the form of branded generics, line extensions, combinations, etc.
• AIL will
continue to market Novo Nordisk’s Insulin, which
contributes around 48% to Abbott’s net sales of ~ Rs 990
crore for 13 months ended Dec 2010, but earns just 4-5%
distribution margin. Both Novo and Abbott are happy about this arrangement. The
demand for insulin
is growing owing to increasing no. of people taking diabetic treatment.
• In December
2010, there were virtually no sales efforts. This was an exceptional decision
taken by the management, as integration efforts had to take place at some point
in time, before actual marriage took place between two companies.
• Sales
growth in 2011 will be higher than market rate of growth, as now company has
several new therapies under its fold and hence, can do much more effective
doctor detailing with expanded resources.
• Significant
investment in marketing, increased field force and new launches have caused a
dent in the profitability of Abbott, where due to integration related
activities, the month of December 2010 saw a loss. Investment phase will
continue for a year or so, which is usual for a company on an accelerated
growth path.
• Post
investment phase, profitability margin is expected to improve from higher
business volumes, business synergies, standardization & simplification of
business processes, productivity improvement etc. Apart from cost saving by
avoiding duplication and other administrative matters, both companies jointly
will have bigger and deeper presence in the market.
• Abbott (+) Solvay combined have plans to grow at ~ 20% + per annum
against pharma market growth of 16% per annum. Increased
profitability will see bottom-line improvement of 25% + for the next 2-3 years.
• Post merger,
the parent company’s stake will increase from the present 68.94% to 76.04%. At
present, there is no plan to de-list Abbott. The parent company is very focused
on
• Both
companies are cash-rich with December 2010-end cash & equivalents worth Rs 188 crore in Abbott and Rs 88 crore in Solvay aggregating to Rs 276 crore (= Rs 130/- per share). Going
ahead, unfettered access to cash flows generated by combined businesses can be
deployed to fund organic and inorganic growth initiatives.
• Expected
EPS for CY11 is Rs.70 and the EPS projection for CY12 is Rs.90. On P/E side, the stock looks a little pricey,
but its trailing EV / Sales multiple (after eliminating trading sales from
insulin, etc.) is much lower at 3.3 times and represents a GOOD long-term BUY.
CMC
Limited
CMC Ltd., a subsidiary of TCS (The largest IT company in the
country by revenue), is an end-to-end IT Solutions provider with capabilities
across the entire IT spectrum; deriving revenues from Customer Services, Systems
Integration (SI), IT enabled Services (ITeS) and
Education & Training horizontals.
The Company has completed a business transformation process
thru FY 2011 by reducing its earlier over exposure
from the less profitable hardware business (as part of customer services
business) to the more of value-added software services & solutions. It is
moving away from being largely a government vendor (now contributes just 1/3rd
of total revenue) to more of private sector and international assignments. The
Company’s focus will now be to grow more profitable, value-added businesses at
faster rate in SI and ITeS comprising of Embedded
Software, Data Digitisation, Workflow Management and
Large Scale Complex Infrastructure Management assignments.
With the increased focus, business from international
markets is expected to contribute to 50% of total revenue from the current 15 %
from SI & ITeS businesses. Embedded software, digitisation and workflow management in different verticals
will drive rapid growth in international market. Besides advanced markets of North
America and Europe, the company is actively pursuing new business opportunities
from SAARC,
Growth in
CMC works along with TCS on several assignments. Presently, about
47-48% of CMC’s revenue comes thru TCS, which does front running and leverages
CMC’s strengths. This is a unique business model and a key differentiator for
CMC and its clients. The combo is well placed to take opportunities in Indian
market particularly in e-governance space where IT penetration is low. While
CMC works on infrastructure management with end-to-end perspective, TCS is into
remote infrastructure management. CMC provides software support, roll-out, infrastructure
management, etc.
Company plans to leverage its customised
solutions which provide huge opportunity under cloud computing, in ITeS and solutions businesses. Company believes that approx.
10% of IT business will move to cloud computing. It will increase penetration
and much longer revenue stream through long-term arrangements & more of
annuity nature of business. This also brings down sales cycle. CMC can thus
leverage its repertoire of IPR developed across different verticals like BFSI, Ports
& Logistics, Biometrics, and host of such applications. Monetization of
these IPR assets, including thru Cloud, will likely to substantially add to
revenue and profits as it will provide its prospective clients an advantage of
going quick to market.
The Company has also set up 100% SEZ on ~ 49 acres of land
in
During FY 2011, total revenues grew @ 24% to Rs 1,081 crore led by 22.5%
increase in SI at Rs 577.34 crore
and 54.3% jump in ITeS turnover to Rs 169.65 crore. 80 clients were
added in FY 2011 taking total client base to 850 clients (domestic – 700 & international–
150, mainly in
The management has a very clear vision for the coming years
in terms of the business prospects of its joint offerings with TCS; and is
confident about doing well. It will increase growth momentum and achieve the
minimum software industry growth rate. Future hiring plan will be dovetailed
with types of assignments received so that fixed costs do not increase much.
In the years ahead, the company expects profit growth to
come from revenue growth (mainly volume growth) and maintain EBIDTA margin at
FY 11 level. Accordingly, existing business is expected to grow @ CAGR of 20%
(+). In addition, Cloud computing will become major growth driver in 2-3 years
time.
Withdrawal of tax break under STPI scheme having come to end
in FY 11, and as existing contracts running in STPI cannot be transferred to
new SEZ, company’s effective tax rate will increase from 15% in FY 11 to 25% in
FY 12 and will get back to 15% level from FY 13 onwards as by then, all new
contracts will become operational from SEZ.
Consolidated EPS (actual) for FY11 has been at Rs.118.4 and
projected EPS for FY12 is Rs.127.60. Considering very good future prospects and
strong backing by TCS, we recommend to “BUY” the share at CMP, which is on a
cum bonus basis as the company has announced a 1:1 bonus.