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Novartis: Stellar growth in profits - Views on News from Equitymaster
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Novartis: Stellar growth in profits
Feb 16, 2011

Novartis has announced its 3QFY11 results. The company has reported 12% YoY and 75% YoY growth in sales and net profits respectively. Here is our analysis of the results.

Performance summary
  • Revenues grow by 12% YoY in 3QFY11 led by growth across all businesses.
  • EBDITA margins substantially rise by 6.7% to 22.3% due to a reduction in all expenses (as percentage of sales).
  • Strong growth in operating profits and higher income lead to the impressive 75% YoY growth in the bottomline.


Financial performance: A snapshot
(Rs m) 3QFY10 3QFY11 Change 9mFY10 9mFY11 Change
Net sales 1,714 1,920 12.0% 5,016 5,652 12.7%
Expenditure 1,446 1,491 3.1% 3,945 4,418 12.0%
Operating profit (EBDITA) 267 429 60.4% 1,072 1,234 15.2%
EBDITA margin (%) 15.6% 22.3%   21.4% 21.8%  
Other income 109 181 66.9% 324 458 41.4%
Interest (net) 1 1 -14.3% 2 2 -15.8%
Depreciation 6 7 21.4% 17 17 0.0%
Profit before tax 369 602 63.0% 1,376 1,673 21.6%
Tax 138 197 43.1% 495 547 10.6%
Profit after tax/(loss) 232 405 74.9% 882 1,126 27.7%
Net profit margin (%) 13.5% 21.1%   17.6% 19.9%  
No. of shares (m)       32.0 32.0  
Diluted earnings per share (Rs)*         43.9  
Price to earnings ratio (x)         14.1  
* on a trailing 12 months basis

What has driven performance in 3QFY11?
  • Revenues for 3QFY11 grew by 12% YoY and were largely led by growth across all businesses. Revenues from the pharma division, which accounts for 70% of total sales, grew by a decent 14% YoY. The OTC business continued to do well as sales from this segment also grew by 14% YoY. While the generics business grew by 21% YoY, sales growth of the animal healthcare business was healthy at 18.5% YoY. For the nine month period, sales grew by 13% YoY once again led by growth across all its 4 businesses.

    Segmental performance
    (Rs m) 3QFY10 3QFY11 Change 9mFY10 9mFY11 Change
    Pharmaceuticals 1,098 1,249 13.8% 3,359 3,762 12.0%
    PBIT margin (%) 19.6% 30.7%   30.6% 30.2%  
    Generics 98 119 21.4% 305 344 12.7%
    PBIT margin (%) 18.8% 49.7%   28.0% 43.0%  
    OTC 250 285 13.7% 627 749 19.4%
    PBIT margin (%) 7.0% 12.4%   2.2% 6.3%  
    Animal health 159 188 18.5% 461 518 12.5%
    PBIT margin (%) 3.0% 2.9%   10.8% 6.9%  
    Total revenues 1,605 1,840 14.7% 4,752 5,372 13.1%
    Total PBIT margin (%) 18.2% 26.3%   24.8% 25.4%  

  • Novartis' operating margins substantially improved by 6.7% to 22.3% during the quarter due to reduction in all expenses (as percentage of sales). Raw material costs, in particular, fell from 39.3% of sales in 3QFY10 to 36.4% of sales in 3QFY11. Further, if one looks at the segmental performance, there was a huge ramp up in the PBIT margins of the generics and the pharma businesses. The animal health business, however, saw a drop in PBIT margins.

  • Strong growth in operating profits (up 60% YoY) and higher income led to the impressive 75% YoY growth in the bottomline.

What to expect?
At the current price of Rs 618, the stock is trading at a price to earnings multiple of 11.4 times our estimated FY13 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 maintain our view on the stock

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