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Novartis: Pricing policy hits profits
Mar 6, 2014

Novartis India has announced its results for the third quarter and nine months ended December 2013 (3QFY14). The company has reported a 4% YoY and 47.5% YoY fall in sales and net profits respectively. Here is our analysis of the results.

Performance summary
  • Net sales decline by 4% YoY during the quarter due to fall in revenues from the pharmaceuticals segment.
  • Novartis reports a loss at the operating level as expenses rise considerably despite the fall in sales.
  • Despite the loss at the operating level, the company manages to record profits of Rs 152 m at the net level even though the latter is down 47.5% YoY.

Financial snapshot
(Rs m) 3QFY13 3QFY14 Change 9mFY13 9mFY14 Change
Net sales 2,338 2,246 -3.9% 6,908 6,617 -4.2%
Expenditure 2,105 2,253 7.0% 6,093 6,703 10.0%
Operating profit (EBDITA) 234 (6)   815 (86)  
EBDITA margin (%) 10.0% -0.3%   11.8% -1.3%  
Other income 199 232 16.8% 613 692 13.0%
Interest (net) 5 1 -84.8% 6 2 -65.5%
Depreciation 11 9 -11.3% 26 28 8.5%
Profit before tax 417 216 -48.3% 1,397 576 -58.7%
Tax 127 63 -50.1% 443 (170) -138.4%
Profit after tax/(loss) 290 152 -47.5% 953 747 -21.7%
Net profit margin (%) 12.4% 6.8%   13.8% 11.3%  
No. of shares (m)       32.0 32.0  
Diluted earnings per share (Rs)*         31.0  
Price to earnings ratio (x)         14.1  
* on a trailing 12 months basis & excluding extraordinary items

What has driven performance in 3QFY14?
  • Net sales for the quarter declined by 4% YoY on account of the 12% YoY fall in revenues from the pharmaceutical segment. The latter accounted for 64% of total revenues during the quarter. Novartis had to reduce the selling prices of some key products arising out of the implementation of new drug pricing policy. This had adverse impact on the revenue and operating profits of the company. While the generics segment also put up a tepid show, the OTC and animal health businesses witnessed decent growth of 17% YoY each.

  • Novartis reported a loss at the operating level as total expenditure increased by 7% YoY even as revenues fell. This was again attributable to the new pricing policy as well as the depreciating rupee, which made imports more expensive. Thus, the overall margins of the company got impacted. In terms of business segments as well, the pharmaceutical and generics segments saw losses. Only the animal health segment was able to record a healthy improvement in margins.

    Revenue break-up
    (Rs m) 3QFY13 3QFY14 Change 9mFY13 9mFY14 Change
    Pharmaceutical 1,618 1,429 -11.7% 4,924 4,429 -10.0%
    Margins 9.6% -2.0%   13.9% -1.2%  
    OTC 323 377 16.7% 805 911 13.1%
    Margins 17.9% 13.6%   13.3% 9.0%  
    Animal Health 240 281 17.1% 716 827 15.5%
    Margins 2.5% 8.6%   3.7% 3.8%  
    Generics 157 160 1.8% 463 450 -2.8%
    Margins 48.9% -1.1%   37.8% 13.4%  
    Grand total 2,338 2,246 -3.9% 6,908 6,617 -4.2%

  • Despite the loss at the operating level, the company managed to record profits of Rs 152 m at the net level even though the latter was down 47.5% YoY. This was largely on account of higher other income and halving of tax expenses. For the nine month period, while total revenues declined by 4% YoY, the fall in net profits was steeper at 22% YoY.
What to expect?
At the current price of Rs 436, the stock is trading at a multiple of 10.4 times our estimated FY16 earnings. Novartis has been witnessing subdued growth since the last few quarters and the impact of the pricing policy has been a major culprit for the same. There remains an element of uncertainty with respect to this in the coming quarters as well. Further, the depreciating rupee is also likely to be an area of concern given that purchase of stock in trade accounts for sizeable chunk of its overall costs. Given the poor performance in 9mFY14, we will have to downgrade our numbers for the year and we maintain that investors do not buy the stock at the current levels.

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