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Novartis: Animal health shines - Views on News from Equitymaster

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Novartis: Animal health shines
May 13, 2010

Novartis has announced its FY10 results. The company has reported 7.3% YoY and 12% YoY growth in sales and net profits respectively. Here is our analysis of the results.

Performance summary
  • Revenues grow by a tepid 7% YoY in FY10 led by the pharmaceutical and animal health businesses.
  • EBDITA margins improve marginally by 0.7% to 21% due to a fall in raw material costs and other expenditure (as percentage of sales).
  • An 11% YoY growth in operating profits coupled with lower depreciation charges and tax expenses lead to the 12% YoY growth in net profits.
  • Board recommends dividend of Rs 10 per equity share (dividend yield of 2%).


Financial performance: A snapshot
(Rs m) 4QFY09 4QFY10 Change FY09 FY10 Change
Net sales 1,379 1,566 13.6% 6,135 6,582 7.3%
Expenditure 1,149 1,252 9.0% 4,892 5,197 6.2%
Operating profit (EBDITA) 230 314 36.4% 1,244 1,385 11.4%
EBDITA margin (%) 16.7% 20.0%   20.3% 21.0%  
Other income 126 115 -9.1% 520 438 -15.6%
Interest (net) 1 1 62.5% 7 3 -54.9%
Depreciation 7 6 -13.8% 27 23 -16.4%
Profit before tax 349 422 20.8% 1,729 1,798 4.0%
Tax 142 143 1.3% 692 638 -7.8%
Profit after tax/(loss) 207 278 34.2% 1,037 1,160 11.8%
Net profit margin (%) 15.0% 17.8%   16.9% 17.6%  
No. of shares (m)       32.0 32.0  
Diluted earnings per share (Rs)         36.2  
Price to earnings ratio (x)         15.5  

What has driven performance in FY10?
  • Revenues for FY10 grew by a subdued 7% YoY and were largely led by the pharmaceutical and animal health businesses. Revenues from the pharma division, which accounts for 70% of total sales, grew by 8% YoY. The robust 22% YoY growth in the animal health division could be attributed to various marketing initiatives undertaken by the company. Having said that, revenues from the generics division fell sharply by 36% YoY. This was mainly due to the one time government tender business for the anti-TB range in FY09 which was not present this year. Sales from the OTC segment managed to grow by 6% YoY although it was pressurized by increased competition.

    Segmental performance
    (Rs m) 4QFY09 4QFY10 Change FY09 FY10 Change
    Pharmaceuticals 954 1,014 6.3% 4,069 4,373 7.5%
    PBIT margin (%) 26.8% 26.4%   28.2% 29.6%  
    Generics 86 94 9.4% 619 399 -35.6%
    PBIT margin (%) 1.9% 27.3%   17.1% 27.8%  
    OTC 179 233 30.5% 809 860 6.3%
    PBIT margin (%) -4.6% 8.6%   8.9% 3.9%  
    Animal health 126 149 18.1% 499 609 22.2%
    PBIT margin (%) 3.8% 21.7%   8.5% 13.5%  
    Total revenues 1,344 1,489 10.8% 5,995 6,241 4.1%
    Total PBIT margin (%) 18.9% 23.2%   22.8% 24.4%  

  • Novartis’ operating margins improved marginally by 0.7% to 21% during the year due to a fall in raw material costs and other expenditure (as percentage of sales). Further, if one looks at the segmental performance, the PBIT margins of its pharma and animal health businesses saw an increase. Margins of the OTC business shrank which could be attributed to the impact of increasing competition. On the other hand, the generics business saw a considerable improvement in margins precisely because of the absence of the tender business which typically enjoys lower margins due to lower prices.

  • An 11% YoY growth in operating profits, lower depreciation charges and tax expenses led to the 12% YoY growth in net profits during the year. For the fourth quarter, since operating margins expanded at a much faster pace than that for the full year, net profits grew by 34% YoY.

What to expect?
At the current price of Rs 563 the stock is trading at a price to earnings multiple of 12.1 times our estimated FY12 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. The company has done better than our estimates and we shall upgrade our numbers for the full year accordingly. Overall, we maintain our positive view on the stock.

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