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Novartis: Animal healthcare boosts sales
Jul 2, 2011

Novartis Healthcare has announced its results for fourth quarter and financial year ended March 2011 (FY11). The company has reported 15.5% YoY and 22.3% YoY growth in sales and net profits respectively for 4QFY11. Here is our analysis of the results.

Performance summary
  • Net Sales grow by a 15.5% YoY in 4QFY11 led by the generics and the animal health businesses.
  • Operating (EBDITA) margins decreased by 0.8% to 19.3% due to rise in other expenditure (as percentage of sales).
  • Net profits by 22.3% YoY in FY11 led by increase in the other income
  • Board recommends dividend of Rs 10 per equity share (dividend yield of 1.2%).


Financial performance: A snapshot
(Rs m) 4QFY10 4QFY11 Change FY10 FY11 Change
Net sales 1,566 1,808 15.5% 6,582 7,460 13.3%
Expenditure 1,252 1,459 16.5% 5,197 5,877 13.1%
Operating profit (EBDITA) 314 350 11.4% 1,385 1,584 14.4%
EBDITA margin (%) 20.1% 19.3%   21.0% 21.2%  
Other income 115 174 51.7% 438 632 44.3%
Interest (net) 1 1 -23.1% 3 3 -6.7%
Depreciation 6 7 16.7% 23 24 3.5%
Profit before tax 422 516 22.4% 1,797 2,189 21.8%
Tax 143 175 22.6% 638 722 13.2%
Profit after tax/(loss) 279 341 22.3% 1,159 1,467 26.5%
Net profit margin (%) 17.8% 18.8%   17.6% 19.7%  
No. of shares (m)   32.0     32.0  
Diluted earnings per share (Rs)   10.7     45.9  
Price to earnings ratio (x)         19.1  
* On a trailing 12-months basis

What has driven performance in 4QFY11?
  • Net Sales for 4QFY11 grew by a 15.5% YoY largely driven by the generics and the animal health business. The generics business grew by 37.6% and the animal health business grew by 26.5% YoY. The pharmaceuticals business which account for two third revenues grew by 12% YoY. The growth from the animal health division could be attributed to various marketing initiatives taken by the company. Sales from the OTC segment revived and grew by 11.6% YoY.
  • Segmental performance

    (Rs m) 4QFY10 4QFY11 Change FY10 FY11 Change
    Pharmaceuticals 1,014 1,136 12.1% 4,373 4,898 12.0%
    PBIT margin (%)
    26.4%
    25.6%
     
    29.6%
    29.1%
     
    Generics 94 129 37.6% 399 473 18.6%
    PBIT margin (%)
    27.3%
    48.4%
     
    27.8%
    44.4%
     
    OTC 233 260 11.6% 860 1,009 17.3%
    PBIT margin (%)
    8.6%
    2.7%
     
    3.9%
    5.4%
     
    Animal health 149 189 26.5% 609 707 16.0%
    PBIT margin (%)
    21.7%
    11.4%
     
    13.5%
    8.1%
     
    Total revenues 1,490 1,714 15.0% 6,241 7,086 13.5%
    Total PBIT margin (%)
    23.2%
    22.3%
     
    24.4%
    24.6%
     

  • Novartis' operating margins decreased by 0.8% to 19.3% during the quarter due to a huge rise in the other expenditure (as percentage of sales). Further, if one looks at the segmental performance, though sales for animal health businesses increased but margins decreased drastically. Margins of the OTC business shrunk further due to the impact of increasing competition. On the other hand, the generics business saw a considerable improvement in margins.


  • For the fourth quarter, PAT grew by 22% YoY growth for the quarter on account of increase in other income. The other income increased by 51% which helped the net profits to increase higher than sales.
What to expect?

At the current price of Rs 875 the stock is trading at a price to earnings multiple of 15.9 times our estimated FY13 earnings. Going forward, the pharmaceutical business is expected to witness a steady growth driver with possible surprises coming from the generics and the animal healthcare businesses. In the pharma business, the company has chalked a strategy of driving growth through life cycle management of existing products and in-licensing opportunities. However, the OTC market is facing stiff competition. The company has done better than our estimates and we will revisit our forward estimates accordingly.

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