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Novartis: Generics eat away margins - Views on News from Equitymaster

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Novartis: Generics eat away margins
Mar 16, 2012

Novartis Healthcare has announced its third quarter results for 2011-2012 (3QFY12). The company has reported 14.1% YoY growth in sales and 5.4% YoY fall in net profits. Here is our analysis of the results.

Performance summary
  • Net sales grow by 14.1% YoY led by the pharmaceutical and OTC business
  • Operating (EBDITA) margins decrease by 480 bps (4.8%) to 17.5% due to rise in other expenditure
  • Net profits decline by 5.4% YoY on account of the substantial drop in operating margins

Financial performance: A snapshot
(Rs m) 3QFY11 3QFY12 Change 9mFY11 9mFY12 Change
Net sales 1,920 2,190 14.1% 5,652 6,318 11.8%
Expenditure 1,491 1,807 21.2% 4,418 5,063 14.6%
Operating profit (EBIDTA) 429 383 -10.8% 1,234 1,256 1.7%
EBDITA margin (%) 22.3% 17.5%   21.8% 19.9%  
Other income 181 186 2.9% 458 537 17.3%
Depreciation 7 8 11.8% 17 19 13.7%
Interest 1 1 0.0% 2 3 77.8%
Profit before tax 603 561 -7.0% 1,673 1,770 5.8%
Tax 197 177 -10.2% 547 579 5.8%
Exceptional Gain / (Loss) - -   - -  
Forex Gain / (Loss) - -   - -  
Minority Interest - -   - -  
Profit after tax/(loss) 405 384 -5.4% 1,126 1,191 5.8%
Net profit margin (%) 21% 18%   20% 19%  
No. of shares (m) 32 32   32 32  
Diluted earnings per share (Rs) 13 12   35 37  
Price to earnings ratio (x)*   15.6        
* On a trailing 12 month basis

What has driven performance in 3QFY12?
  • Net sales for the quarter grew by 14.7% YoY led by the 13.8% YoY growth in the pharmaceutical segment which contributes nearly 67% to total revenues. It was further accompanied by strong 19.7% YoY growth of its OTC (Over-the-counter) business. The generics and the animal health business relatively did not perform too well.

    Revenue break-up
    (Rs m) 3QFY11 3QFY12 Change 9mFY11 9mFY12 Change
    Pharmaceutical 1,249 1,422 13.8% 3,762 4,168 10.8%
    Generics 119 127 7.3% 344 388 12.8%
    OTC 285 341 19.7% 749 874 16.7%
    Animal Health 188 207 9.9% 518 614 18.5%
    Total Sales 1,840 2,096 13.9% 5,372 6,044 12.5%

  • Novartis' operating margins decreased by 480 bps (4.8%) to 17.5% during the quarter due to 330 bps (3.3%) rise in other expenditure. Rise in employee expenses and raw material costs also took their toll on margins.

  • In terms of segments, the big fall in overall margins was mainly due to rising costs in the pharmaceutical business. For the other businesses, the margins were broadly maintained.

  • Net profits fell by 6.5% YoY in spite of good sales growth due to the fall in operating margins.

What to expect?
At the current price of Rs 748 the stock is trading at a price to earnings multiple of 12.5 times our estimated FY14 earnings. Going forward, the pharmaceutical business is expected to be a steady growth driver with possible surprises coming from the Generics and the Animal Health businesses. In the pharma business, the company has chalked a strategy of driving growth through new product launches across all segments and in-licensing opportunities. However, the OTC and generics market is facing stiff competition. At the current market price, the stock does not leave much on the table for investors.

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