Valuing Novartis Stock

While valuing the stock, it is but natural to use the discounting enjoyed by other MNC pharmaceutical stocks like Glaxo and Hoechst Marion Roussel. But this is a faulty approach as NIL is not a pure pharmaceutical company. The agrochemicals business contributed about 48% to NILs turnover, followed by pharmaceuticals with 44 per cent.

The difference in valuations between pure pharmaceutical companies and ones with other businesses has been evident in the past, too. Glaxo and Hoechst enjoyed a P/E multiple of 43.63 times and 43.97 times on a weighted basis over the past four years. In comparison, HCG which is the root of the formation of Novartis, commanded a discounting of 31.85 times.

 

The main reason for Glaxo and Hoechst getting better treatment is largely owing to their functioning in a near-recession-free business. HCG got about 34% of its turnover from agrochemicals. Agrochemicals area susceptible to vagaries of nature, leading to earnings uncertainty.

In the first eight months of 1997-98, NILs sales grew by only 3 per cent. This was due to the unsatisfactory monsoon that affected the agrochemicals divisions performance. This indicates the impact of the agrochemicals business on NIL.

For the half year ended September 97, NIL attained a net profit of Rs 15.4 crore, which translates into an annualised EPS of Rs 9.6 on an equity of Rs 31.9 crore. If we were to assume a discounting range of 30-35 times, the share price could range between Rs 300-350.

However, accurate valuations are possible only after the combined entity stabilises operations. In addition, Novartis globally has products catering to 49% of the therapeutic segment but this is limited to 33% in India.

Since the parent intends to improve its presence in this segment with new product launches, the impact of this should be visible on the operational results in a years time. Valuations will then get better as the contribution of this business increases compared to agrochemicals.