Abbott India: Duty drawback

Higher excise on formulations bought from third-parties raised cost of finished goods for Abbott.

The key takeaway from Abbott India's quarter ended May 2006 results is that higher costs related to purchase of finished goods has once again led to a dip in operating profit and operating profit margins of the company.

Abbott's operating profit (excluding other income) fell 6.2 per cent y-o-y to Rs 17.64 crore for the quarter ended May 2006, compared with 13.9 per cent growth in net sales to Rs 129.6 crore.

The company's purchase of finished goods amounted to Rs 93.68 crore in the May quarter 2006 compared with Rs 72.39 crore a year earlier.

As a result, operating profit margin of the company slipped 292 basis points y-o-y to 13.6 per cent in the quarter ended May 2006.

Other MNC pharma companies such as Pfizer had seen their operating profit margin grow by 236 basis points y-o-y to 24.66 per cent in the May 2006 quarter.

In the March 2006 quarter, Aventis Pharma's operating profit margin had improved by 235 basis points. Meanwhile, Abbott India's performance has been deteriorating since 2004.

Even in the quarter ended February 2006, the company had seen its operating profit margin slip by 175 basis points to 15 per cent.

As a result, it was not surprising that this stock has underperformed the market since the beginning of CY06 "� it has fallen nearly 29 per cent compared with 14.8 per cent gain in the Sensex.

Analysts at brokerage houses pointed out that higher excise duty paid on formulations bought from third-party manufacturers were responsible for Abbott facing a rise in the cost of finished goods.

The company had also benefited from a broad revival in the domestic pharma sales and it led to improved offtake for its medications in segments like gastroenterology, anesthesia and diabetes in the last quarter.

However, higher operating costs offset this growth in sales in the last quarter. Abbott has been slower in introducing new drugs, though it has strong brands such as Brufen and Digene.

Going forward, the company can make its enhanced capacities work better and a focus on cost control will help in improving margins. The stock appears reasonably valued at nearly 12.9 times trailing 12-month earnings.

Divestment blues

Even 15 years after the divestment process began, it seems as difficult for the government to sell PSUs as it was then. The recent attempt of the government to sell 10 per cent in Neyveli Lignite and Nalco is stalled with the PMO announcing to hold all disinvestment decisions and proposals.

The sale of these two companies would have brought in around Rs 1300 crore, which is not much, but if the government was trying to test the waters for more sales in the future, the opposition from coalition partners as well as strikes have scuttled the disinvestment.

It appears that political compulsions will once again prevail and any divestment in the near future will be an extraordinary event.

Bharat Electronics: Healthy topline

In its audited results, Bharat Electronics has posted a markedly improved performance in its operating profit, which grew 31.7 per cent y-o-y in FY06, despite just 10 per cent increase in its topline to Rs 3,536 crore. As a result, its operating profit margin went up 394 basis points to 24 per cent in FY06.

Bharat Electronics did face some cost pressure on the raw material front, especially in the fourth quarter as prices of non-ferrous materials shot up. In Q4, raw material costs went up 650 basis points.

But a healthy 39 per cent growth in the Q4 topline took care of the operating margin, which crossed 26 per cent.

The VRS expenditure in the past is also yielding results "� staff costs declined by 170 basis points to 12 per cent of sales in FY06.

Exports were still small at about $14 million (Rs 61 crore), though the company is planning to increase them to $24 million this year. In terms of its product range, the company is keeping up with customer needs in other countries in areas such as satellite communication and surveillance radars.

Bharat Electronics, which is largely a defence sector player, is also expanding operations in civilian areas.

So, the software development and facilities management of MTNL's convergent billing system worth Rs 500 crore, which will provide a composite bill for all MTNL services in the voice and data areas, is a diversification.

The Edusat, which uses satellite communication for distance education, is another way of broad-basing revenues.

It is also targeting the FM radio and mobile operator markets. At Rs 1075, the stock trades at a trailing P/E of 14.8, which is reasonable given that Bharat Electronics has good export opportunities, besides being a dominant player in the country.