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Aventis: ‘Tax’ing times! - Views on News from Equitymaster

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Aventis: ‘Tax’ing times!
Mar 24, 2006

Performance Summary
Aventis announced mixed results for the fourth quarter and year ending December 2005) late yesterday. While the topline registered a strong growth during the year, led by its strategic brands, margins were under pressure on account of a substantial rise in raw material costs. While the company has managed to meet our revenue estimates, a higher effective tax outgo, which were way above our estimates, has led to a decline in net profits during CY05.

Financial performance: A snapshot
(Rs m) 4QCY04 4QCY05 Change CY04 CY05 Change
Net sales 1,981 1,957 -1.2% 7,350 8,078 9.9%
Expenditure 1,374 1,454 5.8% 5,205 5,837 12.1%
Operating profit (EBIDTA) 607 503 -17.1% 2,145 2,241 4.5%
EBDITA margin (%) 30.6% 25.7%   29.2% 27.7%  
Other income 60 82 36.7% 218 295 35.3%
Depreciation 42 42 0.0% 168 172 2.4%
Interest 1 -   1 -  
Profit before tax 624 543 -13.0% 2,194 2,364 7.7%
Exceptional item - -   68 -  
Tax 218 167 -23.4% 777 913 17.5%
Profit after tax/(loss) 406 376 -7.4% 1,485 1,451 -2.3%
Net profit margin (%) 20.5% 19.2%   20.2% 18.0%  
No. of shares (m) 23.0 23.0   23.0 23.0  
Diluted earnings per share (Rs)*         63.1  
Price to earnings ratio (x)*         29.6  
(* trailing 12-month basis)            

What is the company’s business?
Aventis Pharma, the 50% subsidiary of Aventis SA, France, is the second largest pharma MNC in India with a turnover of over Rs 8.1 bn (CY05). It is the eighth largest player in India with a market share of 2.9%. Aventis has relatively few but very strong brands in the country. Domestic sales constituted 72% of total sales in 2005 and exports constituted the remaining 28%. Over the years, it has progressively transformed itself into a company catering to the chronic (diabetes, cardio vascular) and critical-care therapeutic segments. Apart from catering to the Indian markets, Aventis supplies bulk drugs to its parent. In CY04, the parent merged with another France based pharma company, Sanofi, thus making it part of one of the largest pharma conglomerates in the world.

What has driven performance in CY05?
Strong revenue growth: For the year, Aventis’ topline clocked a decent 10% YoY growth, outpacing its peers Glaxo (8% YoY) and Pfizer (7% YoY). The topline growth is commendable considering the tough scenario faced by the pharma industry due to VAT related concerns. As far as the break-up is concerned, while domestic sales logged in a growth of 9% YoY, exports grew by 12% YoY. The company’s strategic brands such as Amaryl (18% YoY growth), Cardace (15%), Clexane (14%), Frisium (18%) and Rabipur (22%) have all contributed to the topline growth. The company has not commented on its fourth quarter performance and, as such, we have not included the same in our analysis.

Cost break-up
(% of sales) 4QCY04 4QCY05 CY04 CY05
(Increase)/decrease in stock in trade 7.1% -1.3% -2.0% -4.3%
Raw material consumption 37.6% 47.3% 47.5% 51.5%
Staff cost 8.4% 9.7% 8.6% 9.1%
Other expenditure 16.3% 18.7% 16.7% 16.0%

Margins under pressure: For the full year, operating margins contracted by 150 basis points. Other expenditure (as percentage of sales) witnessed a decline during the year. However, this was largely offset by an increase in raw material and staff costs. In fact, the spurt in raw material costs was more pronounced in the fourth quarter (up 970 basis points).

Bottomline falls: Decline in operating margins coupled with a higher tax outgo resulted in a 2% YoY decline in the bottomline. It must be noted that the company’s tax outgo was 39% of PBT as compared to 35% in CY04. Even a 35% YoY rise in other income did not help matters.

Over the last few quarters: Though there has been an inconsistency in Aventis’ revenues over the last few quarters, on the operational front, the company has managed to maintain margins above the 25% level due to its focused business interest. We, however, expect Aventis’ margins to be under pressure going forward due to the fact that the company will not benefit anymore from the restructuring exercise that had helped expand margins in CY04.

Quarterly trend
(%) 3QCY04 4QCY04 1QCY05 2QCY05 3QCY05 4QCY05
Net sales growth 13.1% 14.6% 3.8% 15.8% 21.5% -1.2%
Operating profit margin 33.6% 30.6% 26.9% 29.1% 32.1% 25.7%
Net profit growth 62.8% 33.6% -26.3% 2.4% 16.9% -7.4%

What to expect?
At the current price of Rs 1,846, the stock is trading at a price to earnings multiple of 21.2 times our estimated CY07 earnings. In the domestic market, Aventis’ strong presence in the fast-growing lifestyle segment is likely to stand it in good stead going forward. The company is likely to scale up contribution from exports in the future (outsourcing to the parent). In fact, Aventis is the only MNC pharma major, which has a clear-cut strategy on outsourcing.

Aventis so far has also been aggressive in launching new products and is therefore likely to be a major beneficiary in the patent regime when a slew of new products will be unveiled for the Indian markets. The company has undertaken several brand awareness initiatives over the years, which will augur well in terms of increased visibility for its products. We had recommended a ‘BUY’ on the stock in Oct 2005 with a price target of Rs 2,178 from a two to three year perspective. We maintain our view.

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