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Novartis: Dwindling margins

Aug 11, 2003

MNC pharma major, Novartis announced its 1QFY04 results recently. While the company has recorded a marginal growth in topline, the operating profits have seen a 25% drop. However, sharp rise in other income and lower tax provisions have helped Novartis register a 6% growth in the bottomline. In this context, let us briefly evaluate the performance of the company.

(Rs m)1QFY031QFY04% change
Sales 1,275 1,328 4.1%
Other Income 40 81 101.7%
Expenditure 1,032 1,144 10.9%
Operating Profit (EBDIT) 244 184 -24.6%
Operating Profit Margin (%)19.1%13.8% 
Interest 2 2 -4.5%
Depreciation 21 38 81.0%
Profit before Tax 261 225 -13.7%
Tax 94 48 -48.5%
Profit after Tax/(Loss) 167 176 5.9%
Net profit margin (%)13.1%13.3% 
No. of Shares (eoy) (m)31.731.7 
Diluted Earnings per share*21.022.3 
P/E (at current price) 11.0 

Novartis derives a major portion of its revenues from the pharma business. This segment saw a 6.6% YoY growth to Rs 810 m. The company’s strategy of revitalizing its mature product portfolio by introducing product extensions and variants seems to be paying off. New line extensions of a nasal decongestant and a Calcium Sandoz variant were key to the 19.7% growth in the OTC sales to Rs 134 m. Pricing pressure and a decline in the anti-TB business resulted in Novartis recording an 18.4% decline in the generics business to Rs 248 m.

Expenditure as a % of sales
(Rs m)1QFY031QFY04
Purchase of materials & finished goods50.1%54.2%
Staff cost8.8%9.4%

Despite an increase in net sales, a rise in the materials cost from 50% of revenues to 54% of revenues has resulted in Novartis recording a steep 25% decline in the operating profits. The company has incurred VRS expenditure of Rs 9 m during the current quarter. However, a sharp rise in the other income coupled with a drop in the tax provisions has enabled the company record a marginal increase in net profit. Other income has increased on account of a reversal of provision for wealth tax of Rs 21 m (1QFY03 – Nil) and interest from tax authorities of Rs 18 m (1QFY03 – Nil). Tax provisions, on the other hand, have declined due to a write back of provisions for earlier years of Rs 23 m (1QFY03 – Rs 8 m).

At Rs 245, Novartis is trading at a P/E of 11x its 1QFY04 earnings. Novartis has received shareholder’s approval for the buyback of shares upto an amount not exceeding 25% of its paid up share capital and free reserves at a price not exceeding Rs 250 per share. The company has been witnessing intense pricing pressure and declining margins in the recent times. Further, with the implementation of the new DPCO order, a major portion of its product portfolio is expected to come under DPCO cover. This could put additional pressure on the margins of the company going forward. Hence, the prospects of the company in the medium-term remain a cause of concern.

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