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Novartis: Animal Health boosts sales
Aug 23, 2011

Novartis Healthcare has announced its first quarter results for 2011-2012. The company has reported 11.6% YoY and 19.0% YoY growth in sales and net profits respectively. Here is our analysis of the results.

Performance summary
  • Net Sales grow by 11.6% YoY led by the generics and the animal health businesses.
  • Operating (EBDITA) margins decrease by 0.2% (as percentage of sales) to 19.3% due to rise in other expenditure
  • PAT grows by 19% YoY growth led by a substantial increase in the other income

Financial performance: A snapshot
(Rs m) 1QFY11 1QFY12 Change
Net sales 1,772 1,978 11.6%
Expenditure 1,412 1,581 12.0%
Operating profit (EBIDTA) 360 397 10.3%
EBDITA margin (%) 20.3% 20.1%  
Other income 121 167 38.6%
Depreciation 5 4 -8.5%
Interest 1 1 33.3%
Profit before tax 475 559 17.7%
Tax 160 184 15.0%
Exceptional Gain / (Loss) - -  
Forex Gain / (Loss) - -  
Minority Interest - -  
Profit after tax/(loss) 316 376 19.0%
Net profit margin (%) 18% 19%  
No. of shares (m) 32 32  
Diluted earnings per share (Rs) 10 12  
Price to earnings ratio (x)*   18.3  
*On trailing 12 month basis

What has driven performance in 1QFY12?
  • Net sales for the quarter grew by 11.6% YoY largely driven by the Generics and the Animal Health business. The Generics business grew by 15.7% YoY and the animal health business grew by 31.4% YoY. However, the pharmaceuticals business, which accounts for ~71% revenues, grew by 10% YoY. The growth from the animal health division could be attributed to various marketing initiatives taken by the company. Sales from the OTC segment revived and grew by 11.6% YoY.

  • Novartis is launching all the branded generics drugs from the listed entity. However, some proprietary products are being sold from its unlisted entity. This according to us can be quite a negative for minority shareholders

    Revenue break-up
    (Rs m) 1QFY11 1QFY12 Change
    Pharmaceutical 1,222 1,345 10.1%
    Generics 112 130 15.7%
    OTC 199 209 4.9%
    Animal Health 150 196 31.4%
    Total Sales 1,683 1,881 11.7%
  • Novartis' operating margins decreased by 0.2% (as a % of sales) to 20.1% during the quarter due to the rise in the other expenditure. As the company is increasing its focus towards the branded generics space, there has been an increase on sales and marketing activities. However, the employee productivity has been increasing and it has reduced the employee cost (as a % of sales) from 17.3% to 15.9%. This comes at the time when all other industry players are facing huge cost increases on the employee front.

  • Though sales for pharmaceutical businesses increased margins have decreased. On the other hand, margins for generics and animal health division improved considerably.

  • Net profits grew by 19% YoY on account of an increase in other income. The other income increased by 38.6% YoY helping the net profit growth to be higher than sales growth.

  • In the past quarter, there were rumours in the media of Novartis India being delisted. However, the management through a circular on the exchanges denied the same.

What to expect?
At the current price of Rs 875 the stock is trading at a price to earnings multiple of 15 times our estimated FY14 earnings. Going forward, the pharmaceutical business is expected to be a steady growth driver with possible surprises coming from the Generics and the Animal Health businesses. In the pharma business, the company has chalked a strategy of driving growth through new product launches across all segments and in-licensing opportunities. However, the OTC market is facing stiff competition. At the current market price the stock does not leave much on the table for the shareholders.

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