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Novartis: Poor performance continues - Views on News from Equitymaster

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Novartis: Poor performance continues
Jul 29, 2013

Novartis has announced its 1QFY14 results. The company has reported 1.7% YoY growth in sales, while net profits have significantly declined by 48.6%. Here is our analysis of the results.

Performance summary
  • Topline grows by 1.7% YoY during the quarter due to poor performance across its business segments.
  • Operating margins witness sharp decline of 7.6% to 1.2% during 1QFY14 due to increase in operating expenses.
  • Led by the subdued performance at both the topline and the operating profit level, bottomline declines significantly by 48.6% YoY during 1QFY14.

Financial performance: A snapshot
(Rs m) 1QFY13 1QFY14 Change
Net sales 2,153 2,190 1.7%
Other operating income 42 41 -4.0%
Expenditure 2,003 2,204 10.1%
Operating profit (EBDITA) 193 27 -86.1%
EBDITA margin (%) 8.8% 1.2%  
Other income 212 206 -3.1%
Interest (net) 1 1 -12.5%
Depreciation 8 9 22.4%
Profit before tax 396 222 -43.9%
Tax 126 84 -33.9%
Profit after tax/(loss) 270 139 -48.6%
Net profit margin (%) 12.3% 6.2%  
No. of shares (m)   32  
Diluted earnings per share (Rs)   33.4  
Price to earnings ratio (x)*   12.6  
*based on trailing 12 months earnings

What has driven performance in 1QFY14?
  • Net sales for the quarter grew by 1.7% YoY due to poor performance in most of its business segments. Even the company's core business segment Pharmaceuticals witnessed poor growth of 0.4% YoY, for the said quarter. The overall sales were impacted due to reduction in trade stocks after notification of new drug price control order announced during May 2013.

  • Novartis' operating margins decreased by 760 bps (7.6%) to 1.2% during the quarter due to overall increase in manufacturing and operating expenses. This increase was also attributed to rupee depreciation, as the company imports large part of its drugs from the parent company.

    Revenue break-up
    (Rs m) 1QFY13 1QFY14 Change
    Pharmaceutical 1,620 1,627 0.4%
    Margins 12.7% 6.8%  
    OTC 199 199 -0.1%
    Margins -1.0% -11.7%  
    Animal Health 219 256 16.6%
    Margins 3.1% -0.6%  
    Generics 157 149 -5.1%
    Margins 36.2% 12.6%  
    Grand Total 2,195 2,230 1.6%

  • In terms of profitability of segments, all of them were impacted with OTC and Animal health displaying negative returns. The impact of rupee depreciation and reduction in the stock in trade had impacted margins too.

  • Led by poor sales growth and margin performance at the operating level, net profits witnessed sharp decline of 48.6% YoY.
What to expect?
At the current price of Rs 420, the stock is trading at a multiple of 10 times our estimated FY16 earnings. In light of the company's current performance, we remain cautious on the company's overall growth performance. In addition, as per the company, the expanded scope of drug price control might further impact the sales and thus profitability of the company. We also remain cautious on the depreciating rupee that impacts the company's performance adversely. In light of these developments, we recommend that investors not buy the stock at the current levels, until more clarity emerges on the above mentioned aspects.

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