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Aventis Pharma: Are valuations attractive?

Feb 20, 2002

Aventis Pharma (erstwhile Hoechst Marion) seems to be taking the right steps to inculcate much wanted growth in the company. While operating margins are on a steady rise, product portfolio of the company is increasingly becoming enviable. The company is slowly and steadily shifting its focus towards high margin specialised therapeutic segments. The DPCO order unfortunately seems to be acting as a dampener for the company's valuations. The operating margins of the company have been on an upward spiral thanks to the restructuring benefits and new product introductions. Aventis is slowly transforming from a company concentrated mainly on anti-infectives and pain management to a company specialising in life style therapeutic segments, where the margins are comparatively higher.

The company is also expected to benefit from global bulk outsourcing by its parent company. The company’s Ankleshwar unit is already used by the parent company for this purpose as a sourcing base for a couple of bulk drugs (Ramipril and Articaine). It is expected that outsourcing by the parent company from HMR’s Goa plant would kick off shortly. This would be for Daonil (a leading product in anti-diabetic segment) from India for its European operations.

However, going forward, we expect the company to show spikes in the margins based on product introductions. Further, though the company's product enjoys strong brand recall, it faces stiff competition from other domestic brands and generic products. For example, incase of Amaryl (anti-diabetic), there are already several generic competing products, which are priced below Amaryl. In a country like India where markets are absolutely price sensitive, premium pricing is difficult to continue. Thus, if the margins are to remain buoyant, product introductions will need to be strong. Going by the past experience the company has always benefited from fast product launches by its parent company.

The effect of the proposed change in the DPCO is expected to be mixed. Some of its top selling drugs, covering around 10% of the total sales of the company are expected to go out of price control. However, Daonil, the company’s top selling anti-diabetic product is expected to come under DPCO coverage. Daonil contributes around 11% of the total sales of the company. Though the DPCO coverage of the company still remains high at around 35%, it is expected to drop sharply going forward inline with the change in the revenue structure.

At the current market price of Rs 361, the stock trades at a P/E of 10.4x its FY02 earnings. The slide in the price of the stock seems to be on account of successive disappointments on non-relaxation of DPCO in favour of the company. However, considering the growth prospects and comparative valuations with the peers, the stock looks attractive at the current price.

Comparative Valuations
Particulars CMP P/E (x) P/E (x) Mkt. Cap Mkt.Cap/sales
  (Rs.) FY2002 FY2003 (Rs. Mn.) (x)
Aventis Pharma 361 10.4 9.7 8,303 1.3
GSK India 349 17.6 16.8 26,175 2.3
Pfizer Ltd 462 23.1 20.1 10,626 2.6
Novartis 255 13.9 11.8 8,135 1.7

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