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Novartis: Poor performance - Views on News from Equitymaster
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Novartis: Poor performance
Jun 7, 2013

Novartis has announced its 4QFY13 results. The company has reported 5% YoY growth in sales, while net profits have marginally increased by 2.3%. Here is our analysis of the results.

Performance summary
  • Topline grows by 5% YoY during the quarter led by growth in the Animal health and Generics segment.
  • Operating margins witness sharp decline of 4% due to increase in operating expenses.
  • Bottomline increases marginally by 2.3% YoY during 4QFY13, due to overall poor performance.

Financial performance: A snapshot
(Rs m) 4QFY12 4QFY13 Change FY12 FY13 Change
Net sales 1,985 2,082 4.9% 8,296 8,861 6.8%
Other operating income 44 46 6.4% 147 173 17.3%
Expenditure 1,822 2,043 12.2% 7,004 8,133 16.1%
Operating profit (EBDITA) 163 85 -47.8% 1,439 900 -37.4%
EBDITA margin (%) 8.0% 4.0%   17.0% 10.0%  
Other income 233 223 -4.3% 840 832 -1.0%
Interest (net) 2 1 -77.3% 5 2 -59.3%
Depreciation 8 10 32.9% 27 36 34.5%
Profit before tax 387 298 -23.0% 2,247 1,694 -24.6%
Tax 148 54 -63.8% 727 497 -31.6%
Profit after tax/(loss) 239 244 2.3% 1,520 1,197 -21.2%
Net profit margin (%) 11.8% 11.5%   18.0% 13.3%  
No. of shares (m)         32  
Diluted earnings per share (Rs)         37  
Price to earnings ratio (x)*         17  
*based on trailing 12 months earnings

What has driven performance in 4QFY13?
  • Net sales for the quarter grew by 5% YoY led by growth in the Animal Healthcare and Generic businesses. Pharmaceutical segment, which contributes ~70% to total revenues, witnessed tepid growth of 4%. The Generics segment witnessed decent growth of 16% YoY. This segment contributes ~7.5% to total revenues.

  • Novartis' operating margins decreased by 400 bps (4%) to 4% during the quarter due to overall increase in manufacturing and operating expenses.

    Revenue break-up
    (Rs m) 4QFY12 4QFY13 Change FY12 FY13 Change
    Pharmaceutical 1,372 1,425 3.9% 5,861 6,349 -7.7%
      Margins 13.6% 3.6%   22.0% 11.6%  
    OTC 293 299 1.9% 1,171 1,104 6.1%
      Margins 9.6% 18.6%   15.0% 14.7%  
    Animal Health 224 242 8.2% 837 955 -12.3%
      Margins 9.0% 5.6%   8.9% 4.2%  
    Generics 140 162 16.2% 573 625 -8.3%
      Margins 25.3% 28.1%   33.2% 35.3%  
    Grand Total 2,029  2,128 4.9% 8,442  9,033 7.0%

  • In terms of segments, the big fall in overall margins was mainly due to rising costs in the pharmaceutical and animal health businesses. The biggest fall was in margins of the pharmaceuticals segment, followed by the Animal segment. The generics and the OTC segments witnessed improvement in margins.

  • Despite the 48% YoY decline in operating profits, net profits witnessed marginal growth of 2.4%. This was largely due to fall in tax expenses. At the PBT level, the growth declined by 23% YoY.

What we expect?

At the current price of Rs 510, the stock is trading at a multiple of 10 times our estimated FY15 earnings. In light of the company's current performance, we remain cautious on its Pharmaceutical business which is the major contributor to sales. However, there is a high probability of surprises coming from its Generics segment. The Animal Health businesses and OTC segment on the other hand are facing stiff competition. As the pricing policy gets implemented, one will have to wait and see if the company's brands too get impacted and to what extent. At the current market price, the stock does offer any upside. We thus have a Sell rating on the stock.

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