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Aventis: Landmark CY04

Apr 1, 2005

Performance summary
MNC pharma major Aventis, declared its 4QCY04 and CY04 results last evening. The buoyancy in revenues and profits continued for the company. While revenues were up nearly 15% during the December quarter, profits clocked a 34% growth. The company finished CY04 with nearly 13% revenue and over 50% profit growth. Cost cutting measures has seen the company improving its operating margins by a significant 7.8% during the full year.

(Rs m) 4QCY03 4QCY04 Change CY03 CY04 Change
Net sales 1,728 1,981 14.6% 6,516 7,350 12.8%
Expenditure 1,267 1,374 8.4% 5,119 5,205 1.7%
Operating profit (EBDITA) 461 607 31.7% 1,397 2,145 53.5%
Operating profit margin (%) 26.7% 30.6%   21.4% 29.2%  
Other income 31 60 93.5% 160 218 36.3%
Interest 2 1   2 1  
Depreciation 41 42 2.4% 174 168 -3.4%
Exceptional Item - -   70 68  
Profit before tax 449 624 39.0% 1,451 2,262 55.9%
Tax 145 218 50.3% 465 777 67.1%
Profit after tax/(loss) 304 406 33.6% 986 1,485 50.6%
Net profit margin (%) 17.6% 20.5%   15.1% 20.2%  
No. of shares (m) 23.0 23.0   23.0 23.0  
Diluted earnings per share (Rs)* 52.8 70.5   42.8 64.5  
P/E ratio (x)         19.6  
(* annualised)            

What's the company's business?
Aventis Pharma - the 50% subsidiary of Aventis SA, France is the 2nd largest pharma MNC in India with a turnover of over Rs 7.4 bn (CY04). It is the 6th largest domestic player with a market share of 2.9%. Aventis has relatively few but very strong brands in the country. Over the years, it has progressively transformed itself into a company catering to the chronic (diabetes, CVS) and critical-care therapeutic segments. Apart from catering to the Indian markets, the company supplies bulk drugs to its parent, which constituted about 26% of the company's sales in 1HCY04. Recently, the parent has decided to merge with another France based pharma company, Sanofi, thus making it part of one of the largest pharma conglomerates.

What has driven performance in CY04?
Exports lead the charge:  Sales growth in CY04 was largely driven by strong performance on the exports front. Though we have not got the company's release, just to put things in perspective, exports had grown at 63% YoY during the September quarter (3QCY04) on the back of demand arising from higher supply to its parent company. The company's products are sold in Russia and CIS countries as well. Decent performance in domestic market (6% growth in 3QCY04) is likely to have continued in this quarter too. The company's growth has been in line with the domestic market in last few quarters and it is likely to maintain this momentum going forward. The major growth drivers were the key brands such as Amaryl (17%), Cardace (10%), Clexane (24%) and Targocid (18%) (estimates).

Operating level boost:  The operating profit grew by 54% in the full year CY04. Lower raw material cost and other expenses as a percentage of sales were largely responsible for the margin improvement. The increasing share of outsourcing (export sales) and better management of manufacturing expenses has also led to higher margins. Better product mix, which was possible due to strong focus on strategic brands also played its part in margin improvement. However, the YoY margin advantage is likely to subside in CY05 (as is also seen in 4QCY04).

Cost Structure
(Rs m) 4QCY03 4QCY04 Change CY03 CY04 Growth
Raw Material 844 875 3.7% 3,287 3,302 0.5%
as % of sales 48.8% 44.2%   50.4% 44.9%  
Staff Cost 142 167 17.6% 549 632 15.1%
as % of sales 8.2% 8.4%   8.4% 8.6%  
Others 281 332 18.1% 1,283 1,271 -0.9%
as % of sales 16.3% 16.8%   19.7% 17.3%  
Total 1,267 1,374 8.4% 5,119 5,205 1.7%

Over the last few quarters
As evident from the graph below, the company's performance has improved with every passing quarter. The real kicker in CY04 has come from exports, which continue to grow strongly. However, on the operational front, the company has managed to maintain margins (are superior to the industry) due to its focused business interest. However, margin improvement from here on will be limited.

What to expect?
At Rs 1,262, the stock is trading at 20 times CY04 earnings. Apart from the domestic market, which seems to be doing pretty well, Aventis has an opportunity to scale up the contribution from exports in the future i.e. outsourcing to the parent. In fact Aventis is the only major MNC pharma company, which has a clear-cut strategy on out-sourcing. The company has managed to grow the export side significantly and is likely to go up further, as the company is investing in capacities to capitalize on this opportunity. Also, there is significant opportunity for the company in terms of launching new products from its parent's portfolio in the new patent regime.

We had recommended the stock in December 2004 with a target price of Rs 1,440. We maintain the view. We will be updating our research report once we get a detailed release on Aventis performance.

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