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Novartis: Profitability takes a hit - Views on News from Equitymaster

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Novartis: Profitability takes a hit
Jan 19, 2010

Performance summary
  • Revenues grow by a tepid 7% YoY in 3QFY10 led by the pharmaceutical and animal health businesses.
  • EBDITA margins fall by 1.3% to 15.6% due to a rise in staff costs and other expenditure (as percentage of sales).
  • Fall in operating profits and reduction in other income means that the bottomline declines by 4% YoY.


Financial performance: A snapshot
(Rs m) 3QFY09 3QFY10 Change 9mFY09 9mFY10 Change
Net sales 1,599 1,714 7.2% 4,756 5,016 5.5%
Expenditure 1,330 1,446 8.8% 3,743 3,945 5.4%
Operating profit (EBDITA) 270 267 -0.9% 1,014 1,072 5.7%
EBDITA margin (%) 16.9% 15.6%   21.3% 21.4%  
Other income 149 109 -27.0% 393 324 -17.7%
Interest (net) 5 1 -85.4% 6 2 -69.8%
Depreciation 7 6 -13.8% 20 17 -16.4%
Profit before tax 407 369 -9.2% 1,380 1,376 -0.3%
Tax 165 138 -16.5% 550 495 -10.1%
Profit after tax/(loss) 242 232 -4.2% 830 882 6.2%
Net profit margin (%) 15.1% 13.5%   17.5% 17.6%  
No. of shares (m)       32.0 32.0  
Diluted earnings per share (Rs)         34.1  
Price to earnings ratio (x)         16.9  

What has driven performance in 3QFY10?
  • Revenues for 3QFY10 grew by a subdued 7% YoY and were largely led by the pharmaceutical and animal health businesses. Revenues from the pharma division, which accounts for 71% of total sales, grew by 9% YoY. The robust 28% YoY growth in the animal health division could be attributed to various marketing initiatives undertaken by the company. Having said that, revenues from the generics division fell sharply by 52% YoY. This was mainly due to the one time government tender business for the anti-TB range in 3QFY09 which was not present this quarter. Sales from the OTC segment managed to grow by 7% YoY although it was pressurized by increased competition.

    Segmental performance
    (Rs m) 3QFY09 3QFY10 Change 9mFY09 9mFY10 Change
    Pharmaceuticals 1,010 1,098 8.7% 3,115 3,359 7.8%
    PBIT margin (%) 22.6% 22.3%   28.6% 30.6%  
    Generics 202 98 -51.7% 534 305 -42.8%
    PBIT margin (%) 18.0% 22.8%   19.6% 28.0%  
    OTC 233 250 7.4% 630 627 -0.5%
    PBIT margin (%) 17.5% 8.0%   12.8% 2.2%  
    Animal health 124 159 27.8% 373 461 23.6%
    PBIT margin (%) 0.4% 3.6%   10.1% 10.8%  
    Total revenues 1,569 1,605 2.2% 4,651 4,752 2.2%
    Total PBIT margin (%) 19.5% 18.2%   23.9% 24.8%  

  • Novartis’ operating margins fell by 1.3% to 15.6% during the quarter due to a rise in staff costs and other expenditure (as percentage of sales). During the nine month period, however, operating margins marginally improved by 0.1% to 21.4%. Further, if one looks at the segmental performance, the PBIT margins of its pharma and OTC businesses saw a decline. The fall in the OTC business was particularly pronounced and this could be attributed to the impact of increasing competition. On the other hand, the generics business saw a considerable improvement in margins precisely because of the absence of the tender business which typically enjoys lower margins due to lower prices.

  • Fall in operating profits and reduction in other income meant that the net profits declined by 4% YoY. For the nine month period, however, net profits registered a growth of 6% YoY duly helped by reduction in tax expenses.

What to expect?
At the current price of Rs 575, the stock is trading at a price to earnings multiple of 12.1 times our estimated FY12 earnings. Going forward, the pharmaceutical business is expected to be the key growth driver, which will largely be driven by new product launches. In the pharma business, the company has chalked a strategy of driving growth through life cycle management of existing products and in-licensing opportunities. In the OTC segment, while consolidation of existing brands and launch of new products in various categories is expected to augur well for this business, overcoming competitive pressures will be the key challenge going forward. While we expect the performance of the generics business to remain volatile, the animal health business should see growth on the back of various initiatives taken by the company. Overall, we remain positive on the stock from a long term perspective.

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