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Novartis: Margins on upward spiral - Views on News from Equitymaster
 
 
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  • Jan 28, 2002

    Novartis: Margins on upward spiral

    Novartis India has declared encouraging results for 3QFY02. Net profits have leapfrogged by more than 100% on a back of sharp spurt in operating margins. However, the growth in topline has slowed down considerably with just 2% growth in the concerned quarter. Subsequent to completion of the demerger of its agribusiness and amalgamation of Ciba CKD Biochem, the company has recast prior period results. The results are thus comparable on a year to year basis.

    (Rs m) 3QFY01 3QFY02 % change 9m FY01 9m FY02 % Change
    Sales 1,230 1,255 2.0% 3,433 3,609 5.1%
    Other Income 56 56 -0.4% 186 164 -11.7%
    Expenditure 1,095 990 -9.5% 3,000 2,968 -1.0%
    Operating Profit (EBDIT) 135 265 95.9% 434 641 47.9%
    Operating Profit Margin (%) 11.0% 21.1%   12.6% 17.8%  
    Interest 35 1 -97.2% 98 30 -69.5%
    Depreciation 22 22 2.3% 65 63 -2.0%
    Profit before Tax 134 297 122.1% 457 712 56.0%
    Extraordinary Items - (35)   - -  
    Tax 46 87 86.4% 149 251 68.5%
    Profit after Tax/(Loss) 87 175 100.6% 308 461 49.9%
    Net profit margin (%) 7.1% 14.0%   9.0% 12.8%  
    No. of Shares (eoy) (m) 31.9 31.7   31.9 31.9  
    Diluted Earnings per share* 10.9 22.1   12.9 19.3  
    P/E (at current price) 10.7   12.2  

    This is third quarter in succession that Novartis has reported a positive surprise on the operating margins. The improvement in margins seems to be on the back of new product introductions, a sharp drop in purchase price of pharma products and closure of its loss making ciba vision business. Novartis incurred a one time VRS cost of Rs 18.8 m during the quarter. Further, other expenditure included Rs 16.6 m provision towards dimunition in the value of investments in US 64. Both the above items being extra-ordinary in nature, we have not taken them into consideration while calculating operating margins.

    % of sales 3QFY01 3QFY02
    Raw Materials 4.1% 3.2%
    Staff Costs 7.4% 7.3%
    Purchase of finished goods 47.0% 47.2%

    The segmental information provided by the company discloses some interesting facts. While margins and sales growth in the pharma business have remained more or less stable, there has been a sharp improvement in margins of its consumer health care business (OTC). The operating margins in this business has jumped from 4.5% for the first half, to 23.9% in the third quarter. Though on a small base, sales also seem to be growing at a fast clip in this business.

    Table Showing Segmentwise operating margins
      3QFY02 9 m FY02
    1HFY02 Sales (Rs m) Margins %* Sales (Rs m) Margins %*
    Pharma 1,018 21.7% 2,987 22.4%
    Consumer Health 144 23.9% 343 12.6%
    Animal Healthcare Business 93 17.5% 279 16.8%
    *- Profit before interest and tax

    At the current market price of Rs 236, the stock trades at 12x its annualised earnings for 9m FY02. The benefits of the restructuring excerise undertaken by the company is evident in the current results. Going forward, it seems that though the company would be able to maintain its margins due to its presence in niche speciality segments, the topline is clearly dependent on new product introductions. The stock is likely to see upside due to positive surprise on the margin front.

     

     

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