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Novartis consolidates post spin off - Views on News from Equitymaster
 
 
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  • Aug 23, 2000

    Novartis consolidates post spin off

    An over 40% rise in the stock price (over two months) is the market’s way of looking at the spin off of the agrochemical division by Novartis India. (The international parent Novartis AG has proposed the separation of its agrochemical arm and its merger with the agrochemical arm of Astra Zeneca to form a new company Syngenta. In India too the same process is underway.)

    The reasons for this are not far to seek. The healthcare business (this includes the vision care division and the animal health division) is not an asset heavy business since Novartis India outsources most of its production. The top 8 brands of the company contribute almost 49% of its formulation sales (see table).

    Product profile
    Major Products Therapeutic area % of pharma sales
    (approx.)
    Voveran Anti–inflammatory & pain 18.0%
    Tegretol Central Nervous System (anti–epileptic) 7.0%
    Rimactazid Anti–TB 4.0%
    PZA–CIBA Anti–TB 4.0%
    Methergine Genito–Urinary System 6.0%
    Regestrone Gynaecological 3.0%
    Otrivin Nasal Decongestant 4.0%
    Macalvit Calcium Supplement 3.0%

    The overall operating margins of the company, which were around 17% can be expected to increase to around 20% post the hive off of the agrochemical division. Also, the company would be able to reduce its working capital requirements since the inventory days and debtors days can almost be halved from the present levels of 70 days and 55 days respectively.

    Consequently, the return on capital would zoom to a mind boggling 64% and the return on equity would improve to 42% in FY2001. Besides, the company has launched five new products over the last two years (see table) all of which are out of the purview of the Drug Price Control Order. This can be expected to improve the margins further.

      FY2000
    Pre-spinoff
    FY2001
    Post-spinoff
    ROCE 47.0% 64.0%
    RONW 32.0% 42.0%
    Sales/Assets (times) 8.8 17.8

    ROCE is profit before interest and tax divided by the debt plus equity at the end of the year

    The improvement in profits, the removal of a seasonal business, the introduction of new products coupled with the almost zero debt status of the company should spell good times for the company. The stock quotes at Rs 879 (52 week range: 1436/618) an earning multiple of 40 times its FY01 earnings. These can be estimated to jump almost 50% over the next two years.

    New Products introduced over the last two years
    New Products Purpose
    Femara for treatment of advanced breast cancer
    Exelon for management of Alzheimer's disease
    Epitril for treatment of epilepsy and panic disorders
    PZA–1000 for treatment of TB
    3FD for treatment of TB

    Another trigger for the stock could be a sizeable sum from the grant of development rights at its real estate in Goregaon (a suburb of Mumbai). Last year, the company granted development rights on this real estate and this fetched the company an amount of Rs 66 m. (Novartis’ real estate can fetch it around $ 1.5 bn if it were to give development rights for its entire estate.)

    The only possible dampener to the stock valuations could be the presence of two 100% subsidiaries of the parent, which would be used to launch nutritional products in the future.

     

     

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