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Novartis: OTC shines above others - Views on News from Equitymaster

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Novartis: OTC shines above others
Nov 5, 2010

Novartis has announced its 2QFY11 results. The company has reported 16% YoY and 22% YoY growth in sales and net profits respectively. Here is our analysis of the results.

Performance summary
  • Revenues grow by 16% YoY in 2QFY11 led by the OTC and pharmaceutical businesses.
  • EBDITA margins shrink by 1.1% to 22.8% due to higher raw material and staff costs and advertisement expenses (as percentage of sales).
  • Bottomline growth at 22% YoY was higher than the growth in operating profits due to higher other income and lower depreciation charges.


(Rs m) 2QFY10 2QFY11 Change 1HFY10 1HFY11 Change
Net sales 1,690 1,960 16.0% 3,303 3,732 13.0%
Expenditure 1,286 1,514 17.7% 2,498 2,927 17.1%
Operating profit (EBDITA) 404 446 10.4%  804  806 0.1%
EBDITA margin (%) 23.9% 22.8%   24.4% 21.6%  
Other income 106 156 46.4%  215  276 28.6%
Interest (net) 1 1 20.0%   1   1 0.0%
Depreciation 6 5 -5.4% 11 10 -10.7%
Profit before tax 504 596 18.2% 1,007 1,071 6.3%
Tax 172 190 10.9%  357  350 -2.0%
Profit after tax/(loss) 333 406 21.9%  650  721 10.9%
Net profit margin (%) 19.7% 20.7%   19.7% 19.3%  
No. of shares (m)       32.0 32.0  
Diluted earnings per share (Rs)*         38.5  
Price to earnings ratio (x)         17.5  
* on a trailing 12 months basis

What has driven performance in 2QFY11?
  • Revenues for 2QFY11 grew by 16% YoY and were largely led by the OTC and pharmaceutical businesses. Revenues from the pharma division, which accounts for 71% of total sales, grew by a decent 14% YoY. The strong performance of the OTC segment in the first quarter spilled over to the second quarter as well as this segment grew by a robust 28% YoY. While the generics business grew by 14% YoY, sales growth of the animal healthcare business was lukewarm at 4% YoY. For the half year period too, it was the OTC business that performed the best of the lot as sales grew by 23% YoY.

    Segmental performance
    (Rs m) 2QFY10 2QFY11 Change 1HFY10 1HFY11 Change
    Pharmaceuticals     1,135     1,290 13.7%       2,261       2,512 11.1%
    PBIT margin (%) 34.8% 30.4%   34.6% 29.9%  
    Generics        100        114 13.9%          208          226 8.7%
    PBIT margin (%) 29.7% 39.5%   30.4% 39.4%  
    OTC        207        265 27.8%          377          464 23.2%
    PBIT margin (%) -1.4% 8.5%   -1.7% 2.6%  
    Animal health        174        181 4.0%          302          330 9.3%
    PBIT margin (%) 18.4% 9.3%   14.6% 9.1%  
    Total revenues 1,615 1,849 14.5% 3,147 3,532 12.2%
    Total PBIT margin (%) 28.1% 25.7%   28.1% 25.0%  

  • Novartis' operating margins shrank by 1.1% to 22.8% during the quarter due to higher raw material and staff costs and advertisement expenses (as percentage of sales). Further, if one looks at the segmental performance, while there was a huge ramp up in the PBIT margins of the generics and the OTC businesses, the pharmaceutical and the animal health businesses saw a drop in PBIT margins.

  • Bottomline growth at 22% YoY was higher than the 10% YoY growth in operating profits due to higher other income and lower depreciation charges.

What to expect?
At the current price of Rs 673, the stock is trading at a price to earnings multiple of 12.4 times our estimated FY13 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 our view on the stock.

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