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Novartis: OTC segment recovering? - Views on News from Equitymaster
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Novartis: OTC segment recovering?
Aug 4, 2010

Novartis has announced its 1QFY11 results. The company has reported 10% YoY growth in sales and 1% YoY decline in net profits. Here is our analysis of the results.

Performance summary
  • Revenues grow by 10% YoY in 1QFY11 led by the OTC and animal health businesses.
  • EBDITA margins shrink by 4.5% to 20.3% due to considerable rise in staff costs (as percentage of sales).
  • The 1% YoY decline in net profits is lower than the fall in operating profits due to lower interest costs, tax expenses and depreciation charges.


Financial performance: A snapshot
(Rs m) 1QFY10 1QFY11 Change
Net sales 1,612 1,772 9.9%
Expenditure 1,212 1,412 16.5%
Operating profit (EBDITA) 401 359 -10.3%
EBDITA margin (%) 24.8% 20.3%  
Other income 109 121 11.1%
Interest (net) 1 1 -14.3%
Depreciation 6 5 -16.1%
Profit before tax 503 475 -5.6%
Tax 185 160 -13.9%
Profit after tax/(loss) 318 315 -0.7%
Net profit margin (%) 19.7% 17.8%  
No. of shares (m) 32.0 32.0  
Diluted earnings per share (Rs)*   36.2  
Price to earnings ratio (x)   17.6  
* on a trailing 12 months basis

What has driven performance in 1QFY11?
  • Revenues for 1QFY11 grew by 10% YoY and were largely led by the OTC and animal health businesses. Revenues from the pharma division, which accounts for 70% of total sales, grew by 8.5% YoY. The robust 17% YoY growth in the animal health division could be attributed to various marketing initiatives undertaken by the company. Sales from the OTC segment also grew by a healthy 18% YoY after a few tough quarters. Having said that, revenues from the generics division managed to grow by a mere 4% YoY.
    (Rs m) 1QFY10 1QFY11 Change
    Pharmaceuticals 1,126 1,222 8.5%
    PBIT margin (%) 34.4% 29.4%  
    Generics 108 112 3.8%
    PBIT margin (%) 31.1% 40.1%  
    OTC 170 199 17.6%
    PBIT margin (%) -2.1% -5.3%  
    Animal health 128 150 16.6%
    PBIT margin (%) 9.6% 8.9%  
    Total revenues 1,532 1,683 9.9%
    Total PBIT margin (%) 28.1% 24.2%  

  • Novartis' operating margins shrank by 4.5% to 20.3% during the quarter due to a substantial rise in staff costs (as percentage of sales). Further, if one looks at the segmental performance, the PBIT margins of only the generics business saw an increase possibly due to the absence of the low margin tender business. Margins of the OTC business shrank which could be attributed to the impact of increasing competition. The pharma business and the animal health business also saw a fall in PBIT margins.

  • Despite the 10% YoY fall in operating profits, the decline in net profits was lower at 1% YoY. This was on account of lower interest costs, tax expenses and depreciation charges.

What to expect?
At the current price of Rs 637, the stock is trading at a price to earnings multiple of 11.8 times our estimated FY13 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. Overall, we maintain our view on the stock.

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