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Novartis: Pharma, animal health deliver - Views on News from Equitymaster
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Novartis: Pharma, animal health deliver
Nov 5, 2009

Performance summary
  • Revenues grow by a tepid 6% YoY in 2QFY10 led by the pharmaceutical and animal health businesses.
  • EBDITA margins remain stable at 23.9% as a fall in raw material costs and other expenditure is offset by a rise in staff costs.
  • Net profits grow by 14% YoY, higher than the growth in the topline due to lower tax expenses.

Financial performance: A snapshot
(Rs m) 2QFY09 2QFY10 Change 1HFY09 1HFY10 Change
Net sales 1,600 1,690 5.6% 3,157 3,303 4.6%
Expenditure 1,217 1,286 5.7% 2,413 2,498 3.5%
Operating profit (EBDITA) 383 404 5.4% 744 804 8.1%
EBDITA margin (%) 23.9% 23.9%   23.6% 24.4%  
Other income 130 106 -18.4% 245 215 -12.1%
Interest (net) 1 1 -37.5% 2 1 -20.0%
Depreciation 7 6 -13.8% 14 11 -17.6%
Profit before tax 506 504 -0.4% 974 1,007 3.4%
Tax 214 172 -19.9% 385 357 -7.4%
Profit after tax/(loss) 292 333 13.9% 588 650 10.5%
Net profit margin (%) 18.2% 19.7%   18.6% 19.7%  
No. of shares (m)       32.0 32.0  
Diluted earnings per share (Rs)         34.4  
Price to earnings ratio (x)         15.4  

What has driven performance in 2QFY10?
  • Revenues for 2QFY10 grew by a subdued 6% YoY and were largely led by the pharmaceutical and animal health businesses. Revenues from the pharma division, which accounts for 72% of total sales, grew by 8% YoY. The robust 27% YoY growth in the animal health division could be attributed to various marketing initiatives undertaken by the company. Having said that, revenues from the generics division fell sharply by 31% YoY. This was mainly due to the one time government tender business for the anti-TB range in 2QFY09 which was not present this quarter. Sales from the OTC segment also declined by 2% YoY as it was pressurized by increased competition.

    Segmental performance
    (Rs m) 2QFY09 2QFY10 Change 1HFY09 1HFY10 Change
    Pharmaceuticals 1,053 1,135 7.8% 2,105 2,261 7.4%
    PBIT margin (%) 32.3% 34.8%   31.4% 34.6%  
    Generics 144 100 -30.9% 331 208 -37.4%
    PBIT margin (%) 20.8% 29.7%   20.5% 30.4%  
    OTC 211 207 -2.0% 397 377 -5.1%
    PBIT margin (%) 12.4% -1.4%   10.0% -1.7%  
    Animal health 136 174 27.4% 249 302 21.5%
    PBIT margin (%) 14.5% 18.4%   15.0% 14.6%  
    Total revenues 1,545 1,615 4.6% 3,082 3,147 2.1%
    Total PBIT margin (%) 26.9% 28.1%   26.2% 28.1%  

  • Novartis’ operating margins remained stable at 23.9% during the quarter as a fall in raw material costs and other expenditure was offset by a rise in staff costs (as percentage of sales). During the half year period, however, operating margins improved by 0.8% to 24.4%. Further, if one looks at the segmental performance, the PBIT margins of three of its four businesses (pharma, animal health and generics) saw considerable improvement.

  • Net profits grew by 14% YoY, higher than the growth in the topline, due to lower tax expenses. For the half year period, net profits registered a growth of 11% YoY as against a 5% YoY growth in the topline. This growth came about despite the reduction in other income.

What to expect?
At the current price of Rs 529, the stock is trading at a price to earnings multiple of 11.1 times our estimated FY12 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 a positive view on the stock.

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