Abbott Labs enjoys strong backing from its US-based parent Abbott Laboratories, USA. The company is a turnaround case and it will have a very low equity base even after the rights issue. The proposed rights offer in the ratio of four shares for every twenty five shares is for retiring a part of its high cost debt. This will improve the company's leverage and it will be able to save on interest cost. Besides, it is also planning to introduce new products in the Indian market.

Considering all this, the rights offer seems to be attractive. Based on the nine-month period performance of Abbott Labs, the annualised EPS works out to Rs 13.68. This discounts the offer price of Rs 625 by a multiple of 45.68. Theprice-earning multiple is a bit high. However, that the company is showing signs of a turnaround is investment positive.

The company has restructured its operations by providing a VRS since 1995-96 and it had closed its Kurla plant. For the period ended January 31, 1999, the company has achieved a sales turnover of Rs 73.11 crore and expects to achieve a turnover of Rs 87.29 crore for the financial year 1998-99. The company will save on interest costs as it is retiring a part of its debt through the proposed rights issue. Although the company is replacing debt with equity, the equity will not see a substantial jump. After the proposed rights, the paid up capital will increase marginally from Rs 2.25 crore to Rs 2.61 crore. The rights issue will help Abbott improve its long-term debt-equity ratio which is currently very high at 4.87:1. Post-issue, this will improve to 0.41:1. Abbott Labs is also planning to introduce new products in the Indian market and will retain its competitive position through usage oftechnology from the US-based promoters.

The US-based promoters interest in the company is reflected by the fact that Abbott Laboratories, USA is planning to hike its stake in its Indian subsidiary by picking up the unsubscribed portion, if any, of the rights issue.

Abbott Laboratories, US, and Abbott International hold 51 per cent in the company. While the former holds 11,38,521 equity shares in the Indian outfit, the latter has 9,000 shares. Both companies have secured the requisite approvals to increase their stake up to 74 per cent.

The proposed rights issue is for expanding manufacturing facilities of life saving bulk drugs at Ankleshwar plant (clarithromycin, terazosin hydrochloride and pentothal sodium), to modernise and upgrade manufacturing facilities for the production of essential pharmaceutical formulations as per global standards of environment and safety and to enhance manufacturing facility for pentathol sodium injectable vials. Besides, the company will be setting up a new research anddevelopment facilities at Ankleshwar.

The company has estimated the funds requirement at Rs 22.5 crore. Of this, Rs 1.65 crore will go towards the capacity expansion at Ankleshwar, Rs 1.25 crore towards R&D equipment, Rs 0.5 crore for environment and safety equipment, Rs 1.5 crore for buildings, renovation and furnishing, Rs 1.5 crore for repaying a rupee loan, Rs 4.9 crore for repayment of foreign currency loan and Rs 6.41 crore for repayment of working capital borrowings.

Abbott Labs is the only manufacturer of life saving bulk drug in India. The company has a market share of nearly 33 per cent in this therapeutic category.

The company has recently forayed into hospital goods and nutritional products. The two new products, which were recently launched -- Claribid (Clarithromycin Oral Solids) and Hytrin (Terazosin Hydrochloride) -- have attained brand leadership in their respective categories within a period of two years.

During fiscal 1997-98, pharmaceutical business of the company grew by 16.2 percent, hospital products business by 20.6 per cent and exports by 21.4 per cent over the previous year. However, thanks to a higher interest cost of Rs 3.01 crore, the company incurred a net loss of Rs 11 lakh. For the nine-month period ended December 31, 1998, the company, however, turned the corner by recording a net profit of Rs 2.37 crore. The company has recorded a net sales of Rs 66.56 crore for the nine-month period.