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Aventis: A forgettable year - Views on News from Equitymaster

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Aventis: A forgettable year
Mar 10, 2008

Performance summary
  • Net sales fall by 7% YoY during the quarter due to lower sales reported by both the domestic and export segments.
  • Operating margins shrink by 860 basis points (8.6%) on the back of a rise in raw material costs, staff costs and other expenditure (as percentage of sales).

  • PAT declines by 32% YoY impacted by the contraction in EBDITA margins and fall in revenues despite lower tax expenses and higher other income.

Financial performance: A snapshot
(Rs m) 4QCY06 4QCY07 Change CY06 CY07 Change
Net sales 2,176 2,040 -6.3% 8,840 8,735 -1.2%
Expenditure 1,749 1,750 0.1% 6,633 7,060 6.4%
Operating profit (EBIDTA) 427 290 -32.1% 2,207 1,675 -24.1%
EBDITA margin (%) 19.6% 14.2%   25.0% 19.2%  
Other income 111 182 64.0% 471 740 57.1%
Depreciation 51 46 -9.8% 179 185 3.4%
Interest 1 -   2 - -100.0%
Profit before tax 486 426 -12.3% 2,497 2,230 -10.7%
Tax 139 156 12.2% 804 784 -2.5%
Profit after tax/(loss) 347 270 -22.2% 1,693 1,446 -14.6%
Net profit margin (%) 15.9% 13.2%   19.2% 16.6%  
No. of shares (m) 23.0 23.0   23.0 23.0  
Diluted earnings per share (Rs)*         62.9  
Price to earnings ratio (x)*         14.5  
(* on a trailing 12-month basis)

What has driven performance in CY07?
  • During the year, Aventis’ topline declined by 1% YoY due to lower sales reported by the export segment. The slower 7% YoY growth in domestic revenues was attributed to Aventis receiving significantly lower supplies of the anti-rabies vaccine ‘Rabipur’ due to production issues in the manufacturer's plant. As a result, the expected revenue growth of ‘Rabipur’ could not be achieved. Exports continued to perform poorly declining by 25% YoY during the year. The company attributed this to the appreciation of the rupee against the US dollar, the preference given by some importing countries to locally manufactured products and the reduction in inventories in some importing countries due to decline in their business performance. Given the poor performance reported by Aventis, we shall have to downgrade our revenue estimates for the year accordingly.

    Revenue break-up

    (Rs m) 4QCY06 4QCY07 Change CY06 CY07 Change
    Domestic sales 1,540 1,709 11.0% 6,582 7,031 6.8%
    Export sales 636 331 -48.0% 2,258 1,704 -24.5%
    Total 2,176 2,040 -6.3% 8,840 8,735 -1.2%

  • Operating margins contracted by a substantial 5.8% during CY07, largely due to a rise in staff costs and other expenditure (as percentage of sales). As a result, operating profits fell by a sizeable 24% YoY. Having said that, while we have factored in lower operating margins in CY07, the fall in CY07 has been higher than our estimates. Also, going forward, we do not foresee any significant margin improvement and expect operating margins to remain under pressure.

  • Aventis’ bottomline fell by 15% YoY in CY07. This decline was relatively lesser than the fall in operating profits on account of the higher other income (up 57% YoY). A lower tax outgo (down 3% YoY) also helped matters to an extent.

What to expect?
At the current price of Rs 987, the stock is trading at a price to earnings multiple of 10.5 times our estimated CY09 earnings. In the domestic market, Aventis’ strong presence in the fast-growing lifestyle segment along with its focus on strategic brands are expected to be the key growth drivers going forward. The company, so far, has also been aggressive in launching new products and is therefore likely to be a major beneficiary now that the product patent regime has come into force. The company has undertaken several brand awareness initiatives over the years, which will augur well in terms of increased visibility for its products.

Having said that, we expect the pressure on margins to continue going forward. Also, the inconsistent growth in export sales continues to remain a cause for concern and has further been magnified by the sharp appreciation of the rupee against the dollar. Supply related issues with respect to ‘Rabipur’ have dented the topline performance as a result of which we shall have to downgrade our topline estimates for the year. We shall soon update our research report on the company.

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