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Novartis: Challenges persist - Views on News from Equitymaster
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Novartis: Challenges persist
Dec 12, 2014

Novartis has announced its 2QFY15 results. The company has an increase of 8.9% in the net sales, while net profits have plummeted by 69.2% YoY. Here is our analysis of the results.

Performance summary
  • Net sales are up by 8.9% YoY, led by growth in the Pharmaceuticals and OTC segments.
  • Although the company reports a loss at the operating level to the tune of Rs 2 m, this is considerably lower than the loss of Rs 106 m in 2QFY14.
  • A surge in tax expenses during the quarter leads to the 69% YoY fall in the bottomline.

Financial performance: A snapshot
(Rs m) 2QFY14 2QFY15 Change 1HFY14 1HFY15 Change
Net sales 2,092 2,278 8.9%  4,282 4,299 0.4%
Other operating income 48 70 45.6% 88 136 54.5%
Expenditure 2,246 2,350 4.6%  4,450 4,468 0.4%
Operating profit (EBDITA) (106) (2)   (80) (34)  
EBDITA margin (%) -5.0% -0.1%   -1.8% -0.8%  
Other income 255 225 -11.7% 461 474 2.9%
Interest (net) 1 1 0.0% 1 1 -15.4%
Depreciation 9 9 -4.3% 19 18 -4.8%
Profit before tax 139 214 53.9% 361 421 16.8%
Tax (317) 74   (233) 139  
Profit after tax/(loss) 456 140 -69.2% 594 283 -52.4%
Net profit margin (%) 21.3% 6.0%   13.6% 6.4%  
No. of shares (m)         32.0  
Diluted earnings per share (Rs)         21.1  
Price to earnings ratio (x)*         30.8  
Price to earnings ratio (x)*
*based on trailing 12 months earnings

What has driven performance in 2QFY15?
  • Net sales were up by 8.9% YoY led by growth in the Pharmaceuticals and OTC segments. Both However, the animal health business and the generics segment were down during the quarter. The pricing policy impacted the company’s revenue flow. Not only that, the company received a notice from the government for charging higher on Voveron 50 GE tablets. The government has demanded Rs 281.8 m for overcharging; the company is initiating steps towards this penalty.

    Revenue break-up
    (Rs m) 2QFY14 2QFY15 Change 1HFY14 1HFY15 Change
    Pharmaceutical  1,372  1,552 13.1%   3,000  3,059 2.0%
    Margins -8.5% -0.1%   -0.8% 1.2%  
    OTC 335 422 25.9%  534 650 21.8%
    Margins 16.0% 3.6%   5.7% -3.8%  
    Animal Health 291 238 -18.0%  546 469 -14.2%
    Margins 3.1% 3.6%   1.4% 3.8%  
    Generics 141 135 -4.2%  290 258 -11.1%
    Margins 18.2% 27.9%   21.4% 22.5%  
    Grand Total 2,139 2,348 9.8% 4,370 4,435 1.5%

  • Novartis reported a loss at the operating level to the tune of Rs 2 m. This was again attributable to the new pricing policy and depreciating rupee making imports more expensive. That said, this was better than the operating loss of Rs 106 m reported in 2QFY14.

  • Despite the 54% YoY growth in PBT, the net profits plunged by 69% YoY. This was largely on account of tax expenses of Rs 74 m during the quarter. As against this, in 2QFY14, the company had benefitted from a tax credit.
What to expect?

At the current price of Rs 650, the stock is trading at a multiple of 17.9 times our estimated FY17 earnings. Company has been witnessing subdued growth since the last few quarters. Having said that, we also remain cautious about the depreciating rupee that impacts the company’s performance adversely. During the quarter, the board has approved the transfer scheme of the animal health business. Thus, it would be interesting to see how the business operations pan out for Novartis after this transfer. The current valuations do offer any upside, hence we maintain our SELL rating on the stock.

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