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Novartis: Not a great start to the year - Views on News from Equitymaster
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Novartis: Not a great start to the year
Jul 20, 2009

Performance summary
  • Revenues grow by a tepid 4% YoY in 1QFY10 largely due to the pharmaceutical and animal health businesses.
  • EBDITA margins improve by 1.6% to 24.8% led by the substantial fall in raw material costs (as percentage of sales).
  • Net profits grow by 7% YoY, higher than the growth in the topline, due to better performance at the operating level and despite the fall in other income.

Financial performance: A snapshot
(Rs m) 1QFY09 1QFY10 Change
Net sales 1,557 1,612 3.6%
Expenditure 1,196 1,212 1.3%
Operating profit (EBDITA) 361 401 11.0%
EBDITA margin (%) 23.2% 24.8%  
Other income 114 109 -5.0%
Interest (net) 1 1 0.0%
Depreciation 7 6 -21.1%
Profit before tax 468 503 7.6%
Tax 171 185 8.3%
Profit after tax/(loss) 296 318 7.2%
Net profit margin (%) 19.0% 19.7%  
No. of shares (m) 32.0 32.0  
Diluted earnings per share (Rs)   33.1  
Price to earnings ratio (x)   12.2  

What has driven performance in 1QFY10?
  • Revenues for 1QFY10 grew by a subdued 4% YoY and were largely led by the pharmaceutical and animal health businesses. Revenues from the pharma division, which accounts for 74% of total sales, grew by 7% YoY. The 14% 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 42% YoY. This was mainly due to the one time government tender business for the anti-TB range in 1QFY09 which was not present this quarter. Sales from the OTC segment also declined by 9% YoY as it was pressurized by increased competition.

    Segmental performance
    (Rs m) 1QFY09 1QFY10 Change
    Pharmaceuticals 1,052 1,126 7.1%
    PBIT margin (%) 30.6% 34.4%  
    Generics 187 108 -42.3%
    PBIT margin (%) 20.3% 31.1%  
    OTC 186 170 -8.7%
    PBIT margin (%) 7.2% -2.1%  
    Animal health 112 128 14.3%
    PBIT margin (%) 15.6% 9.6%  
    Total revenues 1,537 1,532 -0.3%
    Total PBIT margin (%) 25.4% 28.1%  

  • Novartisí operating margins improved by 1.6% to 24.8% during the quarter due to a fall in raw material costs (as a percentage of sales) from 7.8% in 1QFY09 to 4.4% in 1QFY10. This fall was enough to offset the rise in all other expenses thereby leading to margin expansion. What is more, the PBIT margins of the pharmaceutical segment were enhanced from 30.6% in 1QFY09 to 34.4% in FY10, which also bolstered overall margins.

  • Net profits grow by 7% YoY, higher than the growth in the topline, due to better performance at the operating level despite the fall in other income.

What to expect?
At the current price of Rs 403, the stock is trading at a price to earnings multiple of 8.5 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.

In May 2009, the parent company Novartis AG announced its offer to increase its stake in Novartis India from 51% to 90% at a price of Rs 351 per share. This offer price was further revised to Rs 450 per share in May 2009. Post the offer, the holding of Novartis AG in Novartis India now stands at 76% and not 90% as envisaged in the earlier offer. Thus, while this raises the possibility of delisting in the future, the parent has not divulged any such intention as yet. Overall, we maintain a positive view on the stock.

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