Abbott India (AIL) is a debt-free company with a cash reserve of Rs 188.5 crore in CY10. Post the merger of Solvay Pharma India (with cash reserves of Rs 51 crore in CY10), AIL’s cash reserves are expected to increase to Rs 330 crore by CY11. The synergy between the two is expected to improve operating efficiencies, leading to expansion of EBITDA margin.
AIL has products across the market segment selling under leading brands such as Digene, Cremaffin, Brufen and Pediasure amongst others.
In recent times, Abbott Laboratories, USA, bought the healthcare solution business from Piramal Healthcare for a consideration of US$ 3.8 billion, which was transferred to the unlisted subsidiary, Abbott Healthcare. Since this unlisted subsidiary is wholly owned, it could result in the possibility of the parent company focusing on the unlisted entity, which could be a concern for AIL shareholders. Further, the merger would limit AIL’s access to untapped therapeutic segments where Piramal already exists.
The stock is currently trading at a PE ratio of 42.01 which is at significant premium to its five year median PE of 13.11. Based on meager five-year growth of 7.5 per cent in earnings per share, its price-to-earnings to growth ratio comes at very unattractive level of 5.6. Although the stock has an improved business outlook in future, it paints a very negative picture currently based on expensive valuations.
This article was originally published on March 15, 2012.
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