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Novartis: Led by animal health and generics - Views on News from Equitymaster
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Novartis: Led by animal health and generics
May 11, 2009

Performance summary
  • Revenues grow by 8% YoY in FY09 led by the generics and animal health businesses.
  • EBDITA margins remain stable at 20.3%.
  • Net profits grow at a lower rate of 7% YoY, despite an increase in other income, on account of higher tax expenses.
  • The Board recommends a dividend of Rs 10 per share (dividend yield of 2.6%).

Financial performance: A snapshot
(Rs m) 4QFY08 4QFY09 Change FY08 FY09 Change
Net sales 1,341 1,379 2.8% 5,694 6,135 7.7%
Expenditure 1,094 1,149 5.0% 4,546 4,892 7.6%
Operating profit (EBDITA) 247 230 -7.0% 1,148 1,244 8.3%
EBDITA margin (%) 18.4% 16.7% 20.2% 20.3%
Other income 108 126 17.2% 430 520 20.9%
Interest (net) 1 1 0.0% 6 7 18.3%
Depreciation 7 7 -6.8% 29 27 -5.6%
Profit before tax 347 349 0.5% 1,543 1,729 12.1%
Tax 132 142 7.6% 571 692 21.2%
Profit after tax/(loss) 215 207 -3.8% 972 1,037 6.7%
Net profit margin (%) 16.1% 15.0% 17.1% 16.9%
No. of shares (m) 32.0 32.0
Diluted earnings per share (Rs) 32.4
Price to earnings ratio (x) 11.9

What has driven performance in FY09?
  • Revenues for FY09 grew by 8% YoY led by the animal health and generics businesses. Revenues from the pharma division, which accounts for 68% of total sales, grew by 5% YoY. The generics division reported a robust 35% YoY growth in revenues due to the one time government tender business for the anti-TB range. The 18% YoY growth in the animal health division was attributed to various marketing initiatives undertaken by the company and resurgence in the poultry market. Sales growth of the OTC segment was lukewarm at 3% YoY as it was pressurized by increased competition.

    Segmental performance
    (Rs m) 4QFY08 4QFY09 Change FY08 FY09 Change
    Pharmaceuticals 963 954 -0.9% 3,865 4,069 5.3%
    PBIT margin (%) 27.6% 26.8% 25.8% 28.2%
    Generics 79 86 8.5% 461 619 34.5%
    PBIT margin (%) -8.0% 1.9% 21.1% 17.1%
    OTC 178 179 0.5% 784 809 3.1%
    PBIT margin (%) 7.8% -4.6% 14.6% 8.9%
    Animal health 86 126 45.9% 425 499 17.4%
    PBIT margin (%) 8.8% 3.8% 12.3% 8.5%
    Total revenues 1,306 1,344 2.9% 5,535 5,995 8.3%
    Total PBIT margin (%) 21.5% 18.9% 22.8% 22.8%

  • Novartis’ operating margins remained stable at 20.3% during the year. Rise in raw material, staff costs and other expenditure (as percentage of sales) were offset by the reduction in purchase of finished goods. The PBIT margins of the pharmaceutical segment improved from 25.8% in FY08 to 28.2% in FY09, which also enabled Novartis to maintain margins.

  • Net profits grew by a tepid 7% YoY, despite the increase in other income, on account of higher tax expenses. The effective tax rate increased to 40% in FY09 from 37% in FY08.

What to expect?
At the current price of Rs 386, the stock is trading at a price to earnings multiple of 8 times our estimated FY11 earnings. Overall, for FY09, the company’s performance has been a tad below our estimates. 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.

The parent company Novartis AG recently announced its offer to increase its stake in Novartis India from the current 51% to 90% at a price of Rs 351 per share. This raises the possibility of delisting in the future although the parent has not divulged any such intention as yet. Further, considering the growth potential of the Indian market and Novartis India’s strong fundamentals, we believe that the offer that values the company at about 11 times its FY09 earnings is pretty underpriced. We shall soon update our research report on the company.

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