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Novartis: All round growth - Views on News from Equitymaster
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Novartis: All round growth
Aug 1, 2008

Performance summary
  • Revenues grow by a decent 11% YoY for 1QFY09 attributed to the strong performances of all its businesses barring OTC.
  • EBDITA margins expand by 490 basis points (4.9%) largely due to a fall in purchase of finished goods and other expenditure (as percentage of sales).
  • Robust performance at the operating level enables the company to clock an impressive 30% YoY growth in net profits.


Financial performance: A snapshot
(Rs m) 1QFY08 1QFY09 Change
Net sales 1,388 1,537 10.7%
Expenditure 1,149 1,196 4.1%
Operating profit (EBDITA) 240 341 42.1%
EBDITA margin (%) 17.3% 22.2%  
Other income 121 135 11.1%
Interest (net) 1 1 -50.0%
Depreciation 7 7 4.4%
Profit before tax 353 468 32.6%
Tax 124 171 37.8%
Profit after tax/(loss) 228 296 29.8%
Net profit margin (%) 16.5% 19.3%  
No. of shares (m)   32.0  
Diluted earnings per share (Rs)   32.5  
Price to earnings ratio (x)*   8.6  
*based on trailing 12 months earnings

What has driven performance in 1QFY09?
  • Novartis began FY09 on a strong note registering a decent 11% YoY growth in the topline. Revenues from the pharmaceutical division (68% of sales) grew by 10% YoY growth in tandem with overall sales. The company attributed this to higher sales of key brands during the quarter. While the animal health business grew by a robust 21% driven by focus on institutional sales, the generics division turned out to be the strongest performer of the lot logging a strong growth of 33% YoY for quarter. This was largely due to tender sales recorded during the quarter. There was no respite for the OTC business, which slumped by 6% YoY, as it was hampered by the pressures of increasing competition.

    Segmental performance
    (Rs m) 1QFY08 1QFY09 Change
    Pharmaceuticals 958 1,052 9.9%
    PBIT margin (%) 22.9% 30.6%  
    Generics 141 187 33.0%
    PBIT margin (%) 24.5% 20.3%  
    OTC 197 186 -5.9%
    PBIT margin (%) 11.1% 7.2%  
    Animal health 93 112 20.8%
    PBIT margin (%) 8.1% 15.6%  
    Total revenues 1,388 1,537 10.7%
    Total PBIT margin (%) 20.4% 25.4%  

  • Novartisí operating margins expanded by an impressive 490 basis points (4.9%) during the quarter, which was largely due to a fall in purchase of finished goods and other expenditure (as percentage of sales). Going forward, we expect margins to improve backed by an improved product mix in its pharmaceuticals, OTC and animal health businesses. To put things into perspective, the PBIT margins of the pharmaceutical segment improved from 22.9% in 1QFY08 to 30.6% in 1QFY09, while that of the animal health business expanded from 8.1% in 1QFY08 to 15.6% in 1QFY09.

  • Strong performance at the operating level was responsible for Novartis posting a strong 30% YoY growth in net profits. However, this growth was relatively slower than the 42% YoY growth in operating profits due to a higher tax outgo.

What to expect?
At the current price of Rs 281, the stock is trading at a price to earnings multiple of 5.9 times our estimated FY11 earnings. Going forward, the pharmaceutical and OTC businesses are expected to be the key growth drivers, 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, consolidation of existing brands and launch of new products in various categories is expected to augur well for this business. Besides this, the managementís plans of launching patented products in India from 2008 onwards can be construed as a positive step. Thus, we maintain our positive view on the stock from a long-term perspective.

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