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Novartis: Plodding on - Views on News from Equitymaster

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Novartis: Plodding on
May 14, 2008

Performance summary
  • Revenues grow by a mere 2% YoY for FY08 attributed to poor performance of its pharmaceuticals and OTC businesses.

  • EBDITA margins expand by 160 basis points (1.6%) largely due to lower raw material and advertisement expenses (as percentage of sales).

  • Net profit growth at 10% YoY is slower than the 12% YoY growth in operating profits due to higher tax expenses.

Financial performance: A snapshot
(Rs m) 4QFY07 4QFY08 Change FY07 FY08 Change
Net sales 1,239 1,306 5.4% 5,422 5,535 2.1%
Expenditure 1,083 1,094 1.0% 4,537 4,546 0.2%
Operating profit (EBDITA) 156 212 35.7% 886 988 11.6%
EBDITA margin (%) 12.6% 16.2%   16.3% 17.9%  
Other income 200 143 -28.4% 476 546 14.7%
Interest (net) 2 1 -60.0% 6 6 -4.8%
Depreciation 7 7 10.6% 27 29 6.7%
Profit before tax 348 347 -0.2% 1,329 1,500 12.9%
Tax 109 132 20.8% 468 571 22.0%
Extraordinary item - -   25 43  
Profit after tax/(loss) 239 215 -9.8% 886 972 9.8%
Net profit margin (%) 19.3% 16.5%   16.3% 17.6%  
No. of shares (m)       32.0 32.0  
Diluted earnings per share (Rs)         30.4  
Price to earnings ratio (x)         9.9  

What has driven performance in FY08?
  • Novartis’ performance during FY08 left a lot to be desired with revenues growing by a staid 2% YoY, 3% lower than our estimates. Revenues from the pharmaceutical division (70% of sales) recorded a staid 1% YoY growth more or less in tandem with overall sales. The company attributed this to reduction in the price of one of its key products ‘Tegrital’ by the Government and increasing competition for its key brands. While the generics division grew by 6%, the animal health business turned out to be the strongest performer of the lot logging a strong growth of 18% YoY for the full year. Various marketing initiatives undertaken by this division yielding benefits and resurgence in the poultry segment augmented sales from this business. There was no respite for the OTC business, which slumped by 2% YoY, as it was hampered by the pressures of increasing competition. Having said that, while this division fared poorly in 9mFY08, the impressive 42% YoY growth recorded in 4QFY08 was instrumental in minimizing the extent of decline for the year.

    Segmental performance
    (Rs m) 4QFY07 4QFY08 Change FY07 FY08 Change
    Pharmaceuticals 960 963 0.3% 3,835 3,865 0.8%
    PBIT margin (%) 23.7% 27.6%   21.4% 25.8%  
    Generics 92 79 -14.1% 433 461 6.4%
    PBIT margin (%) 6.1% -8.0%   27.2% 21.1%  
    OTC 125 178 41.6% 796 784 -1.5%
    PBIT margin (%) -18.3% 7.8%   14.0% 14.6%  
    Animal health 62 86 40.1% 359 425 18.1%
    PBIT margin (%) -14.6% 8.8%   8.6% 12.3%  
    Total revenues 1,239 1,306 5.4% 5,422 5,535 2.1%
    Total PBIT margin (%) 16.3% 21.5%   19.9% 22.8%  

  • Novartis’ operating margins expanded by 160 basis points (1.6%) during the year, which has largely been due to lower raw material and advertising expenses (as percentage of sales). Going forward, we expect margins to improve backed by an improved product mix in both its pharmaceuticals and OTC businesses. To put things into perspective, the PBIT margins of the pharmaceutical segment improved from 21.4% in FY07 to 25.8% in FY08. Similarly, despite the poor performance of the OTC business with respect to the topline, the PBIT margins of this business improved from 14% in FY07 to 14.6% in FY08.

  • Bottomline growth (up 10% YoY) failed to keep pace with the growth in operating profits (up 12% YoY) largely due to higher tax expenses. Infact, if one excludes the impact of the extraordinary income, then the growth in bottomline further slows down to 8% YoY.

What to expect?
At the current price of Rs 302, the stock is trading at a price to earnings multiple of 8.9 times our estimated FY10 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, consolidation of existing brands and launch of new products in various categories is expected to augur well for this business. Besides this, the management’s plans of launching patented products in India from 2008 onwards can be construed as a positive step. Thus, we maintain our positive view on the stock from a long-term perspective. We shall soon update our research report on the company.

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