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Novartis: Quite a poor performance - Views on News from Equitymaster

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Novartis: Quite a poor performance

Aug 25, 2014

Novartis has announced its 1QFY15 results. The company has reported 7.7% YoY fall in sales, while net profits are up by 3.2%. Here is our analysis of the results.

Performance summary
  • Topline falls by 7.7% YoY during the quarter due to poor performance across its business segments.
  • Decline in topline impacts the operating profits. Subsequently, company reports operating loss of Rs 31 m vs. operating profit of Rs 27 m in 1QFY14.
  • However, bottomline is up by 3.2% YoY during the quarter on the back of higher other income and lower tax expenses.

Financial performance: A snapshot
(Rs m) 1QFY14 1QFY15 Change
Net sales 2,190 2,021 -7.7%
Other operating income 41 67 64.4%
Expenditure 2,204 2,119 -3.9%
Operating profit (EBDITA) 27 (31)  
EBDITA margin (%) 1.2% -1.5%  
Other income 206 249 21.0%
Interest (net) 1 1 -28.6%
Depreciation 9 9 -5.4%
Profit before tax 222 208 -6.4%
Tax 84 65 -22.3%
Profit after tax/(loss) 139 143 3.2%
Net profit margin (%) 6.2% 6.9%  
No. of shares (m)   32.0  
Diluted earnings per share (Rs)   31.0  
Price to earnings ratio (x)*   22.0  
*based on trailing 12 months earnings

What has driven performance in 1QFY15?
  • Net sales for the quarter declined by 7.7% YoY due to poor performance in most of its business segments. Barring OTC segment which was up by 15% YoY, all the business segments declined during the quarter.

    Revenue break-up
    (Rs m) 1QFY14 1QFY15 Change
    Pharmaceutical     1,627     1,506 -7.4%
    Margins 5.7% 2.5%  
    OTC 199 228 15.0%
    Margins -11.7% -17.6%  
    Animal Health 256 230 -9.9%
    Margins -0.6% 4.0%  
    Generics 149 123 -17.6%
    Margins 24.4% 16.4%  
    Grand Total 2,230 2,088 -6.4%

  • The impact of pricing policy continued to impact the company's performance. Reduction in pricing of key products adversely impacted revenues and margins. The regulator continues to bring more products under pricing control as seen recently during the month of July. This expanded scope of pricing can further impact the company's business. Over and above, depreciating rupee too impacted the company's performance negatively.

  • Because of the decline in sales, the company reported a loss at the operating level for the quarter. However, the bottomline grew by 3.2% YoY during the quarter on the back of higher other income and lower tax expenses.

    Parent company enters into JV

    Few months back, the parent company Novartis AG, entered into joint venture (JV) with the Glaxosmithkline Plc UK and Eli-Lilly USA.

    As per this JV, Novartis AG and GSK Plc have agreed to create a consumer healthcare business through a joint venture between Novartis OTC and GSK Consumer Healthcare. Novartis holds approximately 36.5% share of the JV.

    Further, Novartis AG has also entered into deal with Eli-Lilly to divest its animal business to the latter.

    Both these transactions are awaiting approval and are expected to close in 2015. Post these transactions, Novartis India will evaluate these options and take necessary approvals in India at the appropriate time.

    As of now there will be no change in the Indian subsidiary's operations.

What to expect?
At the current price of Rs 681, the stock is trading at a multiple of 17.9 times our estimated FY17 earnings. In light of the company's current performance, we remain cautious on the company's overall growth performance. Further, as per the company, the expanded scope of drug price control might further impact sales and thus profitability. The depreciating rupee is also another cause for concern. In light of these developments, we believe the stock will not offer any substantial upside and thus should not form part of the investor's portfolio.

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