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Novartis: Long way to go

May 18, 2004

Novartis India declared its 4QFY04 results and FY04 results. The company has posted an 83% rise in net profits over FY03. Net sales were higher by 7% while the operating margin was higher at 14.6%. We take a closer look at the reasons behind those numbers and the future outlook. First, a brief overview of Novartis is important. The company has a strong presence in TB drugs, respiratory and anti inflammation segment. Also, it has a very strong parent back up which is dedicated towards research work and has consistently introduced new products in different therapeutic segment. However, it has a larger proportion of sales coming from trading activity rather than manufacturing. This is a question mark on the company's seriousness about Indian market.

For the quarter ending March 2004, net sales were up 33%, which is on the backdrop of a bad performance last year in the same quarter due to transporters strike and confusion regarding VAT implementation. However, sales growth for the full year at 7% is less than the industry growth, which could be attributed to the lack of new product launches in FY04. Had it not been for the sharp spurt in sales in 4QFY04, turnover growth for FY04 would have been lower.

(Rs m) 4QFY03 4QFY04 Change FY03 FY04 Change
Net sales 768 1,023 33.3% 4,717 5,049 7.0%
Other income 94 210 - 403 581 -
Expenditure 811 942 16.1% 4,104 4,310 5.0%
Operating profit (EBDITA) (43) 82 -289.1% 614 739 20.4%
Operating profit margin (%) -5.6% 8.0%   13.0% 14.6%  
Interest 3 3 24.0% 9 9 2.2%
Depreciation 56 16 -71.7% 168 132 -21.8%
Profit before tax (8) 273   839 1,179 40.5%
Extraordinary items            
Tax (22) 64   219 42 -80.8%
Profit after tax/(loss) 13 209 1481.1% 620 1,137 83.4%
Net profit margin (%) 1.7% 20.4%   13.1% 22.5%  
No. of shares (m)       32.0 32.0  
Diluted earnings per share (Rs)*       19.4 35.6  
P/E ratio (x)         9.4  
(* annualised)            

There are two reasons behind the rise in net profit in FY04. Other income grew at a faster clip and has contributed to 51% of net profit. Other income includes the sale of land in Mumbai and writes back of the provision of wealth tax. Secondly, the company has allocated lesser provision for tax because of reversal of deferred tax to the extent of Rs 230m. Excluding all these three components from both the periods, the net profit of the company has in fact fallen by 7%. Higher other income is due to increased investments as well as the restructuring done by selling unproductive assets.

The following chart shows how Novartis has fared against its MNC peers in terms of growth in sales over the last over last eight quarters. It shows that the growth rate of Novartis has consistently been low and volatile as compared to other four MNC pharma companies.

The stock of the company is trading at a P/E of 9.4x FY04 earnings. The valuations have been at a discount to its peers for reasons mentioned above and lack of new product introductions. The company's future growth depends upon the actions taken by new government on the Patent bill, which is pending in the parliament. If the bill is passed it will be a great boost for the company. However, due to pressures from the left parties there might be some amendments in the bill, which may not be favorable for MNC pharma companies.

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