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Novartis: Quite a poor performance
Jan 23, 2013

Novartis has announced its 3QFY13 results. The company has reported 5% YoY growth in sales, while net profits have declined by 24.5%. Here is our analysis of the results.

Performance summary
  • Topline grows by 5% YoY during the quarter led by growth in the Pharmaceuticals, Animal Healthcare and Generic businesses.
  • Operating margins witness sharp decline of 7% due to increase in raw material cost and operating expenses.
  • Bottomline declines by 24.5% YoY during 3QFY13 largely led by lower topline growth and poor performance at the operating level.

Financial performance: A snapshot
(Rs m) 3QFY12 3QFY13 Change 9MFY12 9MFY13 Change
Net sales 2,223 2,335 5.0% 6,414 6,904 7.6%
Expenditure 1,844 2,102 14.0% 5,182 6,090 17.5%
Operating profit (EBDITA) 379 234 -38.4% 1,232 814 -33.9%
EBDITA margin (%) 17.0% 10.0%   19.2% 11.8%  
Other income 190 199 4.3% 560 613 9.4%
Interest (net) 1 5 666.7% 3 6 81.3%
Depreciation 8 11 39.5% 19 26 35.1%
Profit before tax 561 417 -25.7% 1,770 1,396 -21.1%
Tax 177 127 -28.4% 579 443 -23.4%
Profit after tax/(loss) 384 290 -24.5% 1,191 952 -20.0%
Net profit margin (%) 17.3% 12.4%   18.6% 13.8%  
No. of shares (m)         32.0  
Diluted earnings per share (Rs)         40.2  
Price to earnings ratio (x)*         16.2  
*based on trailing 12 months earnings

What has driven performance in 3QFY13?
  • Net sales for the quarter grew by 5% YoY led by growth in Pharmaceuticals, Animal Healthcare and Generic businesses. The Pharmaceutical segment, which contributes 70% to total revenues, witnessed tepid growth of 5% YoY. Animal segment witnessed decent growth of 14% YoY. This segment contributes 10% to total revenues.

  • Novartis' operating margins decreased by 700 bps (7%) to 10% during the quarter due to overall increase in manufacturing and operating expenses.

    Revenue break-up
    (Rs m) 3QFY12 3QFY13 % Change 9MFY12 9MFY13 % Change
    Pharmaceutical 1,532 1,618 5.6% 4,489 4,924 69.3%
    Margins 21.8% 9.6%   24.6% 6.6%  
    OTC 342 323 -5.6% 878 805 13.8%
    Margins 20.8% 17.9%   16.7% 6.4%  
    Animal Health 207 237 14.5% 614 713 10.1%
    Margins 6.9% 2.6%   8.9% 1.9%  
    Generics 142 157 10.6% 433 463 6.7%
    Margins 40.5% 48.9%   35.8% 8.9%  
    Grand Total 2,223 2,335   6,414 6,904  

  • In terms of segments, the big fall in overall margins was mainly due to rising costs in the pharmaceutical and animal health businesses. However, the generic segment witnessed huge jump in margins. The margins for this segment increased by 8% in 3QFY13. The margins of the OTC segment declined by at 2% YoY during 3QFY13.

  • Led by the tepid growth in sales and poor performance at the operating level, net profits fell by 24% YoY.

What to expect?
At the current price of Rs 650, the stock is trading at a multiple of 12 times our estimated FY15 earnings. In light of the company's current performance, we remain cautious on its Pharmaceutical business which is the major contributor to sales. However, there is a high probability of surprises coming from its Generics segment. The Animal Health businesses and OTC segment on the other hand are facing stiff competition. At the current market price, the stock does not leave much on the table for investors. We have a Sell rating on the stock.

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