Novartis India was formed by the merger of the healthcare division and agri businesses of Sandoz (India) and Hindustan Ciba Geigy. It is a 51 per cent subsidiary of Novartis AG of Switzerland. Positioned as a life sciences company, its business mix by sales in fiscal 1988 includes pharmaceuticals (45 per cent), agrochemicals (44 per cent), seeds (6 per cent) animal healthcare (3 per cent) and optics (1 per cent).

Over the last two years, the company has been integrating the operations of Sandoz India and Hindustan Ciba Geigy.In the process, it has rationalised its distribution system, pruned its workforce and increased emphasis on its supply-chain management. The full benefits of integration will translate into productivity gains in fiscal 1998-99 through increased market coverage, leaner workforce and rationalisation of the distribution and outsourcing arrangements.

States the Kotak Securities' report, "We expect earnings to grow at a CAGR of 27.8 per cent over the next three years with an EPS of Rs 22.9 in fiscal 1998-99 (last year Rs 15.3). Based on our composite valuation model, we have a conservative 12-15 month target of Rs 751. The second-quarter results is likely to trigger a further stock outperformance."

On the flip side, the seasonal nature of Novartis' agro-business, which accounted for a major portion of sales during 1997-98, is a cause of concern. It is largely dependent on the monsoon -- June-September being the months of peak sales. Besides, Novartis is a net forex spender, with significant imports from theparent company. Issues relating to rupee depreciation and transfer pricing with the parent could impact earnings ans sentiment towards the stock.

Moreover, Novartis AG has set up a wholly-owned subsidiary in India which will cater to the export market. This will restrict the export growth potential of Novartis' pharma business and, consequently, its forex earnings ability. This means Novartis India will continue to be a net forex spender for the next few years -- this is a pity as most pharma companies in India have relied on export earnings to boost earnings.

Novartis' pharmaceutical business includes popular brands like voveran (pain killer), tegretol (anti-epileptics) and rimactazid (anti-TB). The business grew at about 13 per cent in the last fiscal and Kotak Securities expects it to see a CAGR of 16 per cent in the next few years. As part of its growth strategy, Novartis has reorganised its pharmaceutical business to sharpen its marketing focus. Besides, the company is in the process of reducing theproportion of business from price-controlled products from 20 per cent to 15 per cent. This will give Novartis ample scope for market-driven price revisions.

One area where Novartis scores over its rivals is its lower exposure to the highly-competitive segments like anti-infectives, vitamins as well as cough and cold formulations. Instead, Novartis has always focused on high value-added therapeutic segments which include oncological, gynaecological and drugs related to the central nervous system. These segment offer Novartis more elbow room for manoeuvring prices as they are less sensitive to competitive pricing pressures.

Novartis' agrochemical business, which grew by about 5 per cent in fiscal 1998, is likely to see a CAGR of 15 per cent over the next few years. The company is the second largest player in the Indian pesticide market with a 10 per cent market share. For the future, the company plans to renew its product portfolio through new introductions and strengthen emphasis on direct marketing.While focusing on growth, the company has also sought to minimise risk through a strategy of diversifying exposure to crops, spreading geographical risks, balancing its product portfolio with fungicides, herbicides and insecticides.