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Novartis: Displaying steady growth - Views on News from Equitymaster

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Novartis: Displaying steady growth
Feb 17, 2009

Performance summary
  • Revenues grow by a healthy 15% YoY for 3QFY09 led by the pharmaceuticals and generics businesses.
  • EBDITA margins expand marginally by 0.7% largely due to a reduction in purchase of finished goods (as percentage of sales).
  • Net profits grow at a lower rate of 8% YoY on account of higher tax expenses.


Financial performance: A snapshot
(Rs m) 3QFY08 3QFY09 Change 9mFY08 9mFY09 Change
Net sales 1,387 1,599 15.3% 4,353 4,756 9.3%
Expenditure 1,162 1,330 14.5% 3,452 3,743 8.4%
Operating profit (EBDITA) 225 270 19.6% 901 1,014 12.5%
EBDITA margin (%) 16.2% 16.9% 20.7% 21.3%
Other income 139 149 6.8% 322 393 22.1%
Interest (net) 2 5 100.0% 5 6 21.2%
Depreciation 7 7 -11.0% 21 20 -5.2%
Profit before tax 355 407 14.7% 1,196 1,380 15.4%
Tax 130 165 27.0% 439 550 25.3%
Profit after tax/(loss) 225 242 7.6% 757 830 9.6%
Net profit margin (%) 16.2% 15.1% 17.4% 17.5%
No. of shares (m) 32.0 32.0
Diluted earnings per share (Rs) 32.7
Price to earnings ratio (x)* †††††††† 7.6
*based on trailing 12 months earnings

What has driven performance in 3QFY09?
  • Revenues for 3QFY09 grew by a healthy 15% YoY led by the pharmaceuticals and generics businesses. Revenues from the pharma division, which accounts for 67% of total sales, grew by 12% YoY. The generics division reported a robust 80% YoY growth in revenues due to increased tender sales. While the OTC business witnessed a tepid growth of 6% YoY, the animal health division performed poorly with sales declining by 1% during the quarter. For the nine-month period overall revenues registered a 9% YoY growth led by the generics, pharma and animal health businesses.

    Segmental performance
    (Rs m) 3QFY08 3QFY09 Change 9mFY08 9mFY09 Change
    Pharmaceuticals 903 1,010 11.8% 2,903 3,115 7.3%
    PBIT margin (%) 17.8% 22.6% 25.3% 28.6%
    Generics 113 202 79.6% 382 534 39.8%
    PBIT margin (%) 33.6% 18.0% 27.1% 19.6%
    OTC 220 233 5.9% 607 630 3.9%
    PBIT margin (%) 20.7% 17.5% 16.6% 12.8%
    Animal health 126 124 -1.2% 338 373 10.2%
    PBIT margin (%) 15.1% 0.4% 13.2% 10.1%
    Total revenues 1,362 1,570 15.3% 4,229 4,651 10.0%
    Total PBIT margin (%) 19.3% 19.5% 23.2% 23.9%

  • Novartisí operating margins improved marginally by 0.7% during the quarter, which was largely due to a reduction in purchases of finished goods (as percentage of sales). For 9mFY09 too, operating margins improved marginally by 0.6%. Going forward, we expect margins to improve backed by an improved product mix in its pharmaceuticals, OTC and animal health businesses. The PBIT margins of the pharmaceutical segment improved from 17.8% in 3QFY08 to 22.6% in 3QFY09 thereby contributing to the improvement in margins.

  • Net profits grew by 8% YoY and this growth rate was lower than the 20% YoY growth in operating profits on account of higher tax expenses. During the nine-month period, net profits grew by 10% YoY.

What to expect?
At the current price of Rs 247, the stock is trading at a price to earnings multiple of 5.2 times our estimated FY11 earnings. Going forward, the pharmaceutical and OTC businesses are expected to be the key growth drivers, 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. Thus, we maintain our positive view on the stock from a long-term perspective.

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