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Aventis: Exports play spoilsport! - Views on News from Equitymaster
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Aventis: Exports play spoilsport!
Apr 17, 2007

Performance summary
Aventis has announced mixed results for the first quarter ended March 2007. While increase in revenues from the domestic market has largely driven the topline growth, exports continued to disappoint once again registering a 10% YoY decline. Operating margins have contracted owing to rise in raw material and staff costs. A considerably higher other income has led to the bottomline growing at a faster pace than the topline despite a higher tax outgo.

Financial performance: A snapshot
(Rs m) 1QCY06 1QCY07 Change
Net sales 2,005 2,129 6.2%
Expenditure 1,513 1,635 8.1%
Operating profit (EBIDTA) 492 494 0.4%
EBDITA margin (%) 24.5% 23.2%  
Other income 96 200 108.3%
Depreciation 43 45 4.7%
Profit before tax 545 649 19.1%
Tax 176 216 22.7%
Profit after tax/(loss) 369 433 17.3%
Net profit margin (%) 18.4% 20.3%  
No. of shares (m) 23.0 23.0  
Diluted earnings per share (Rs)*   76.4  
Price to earnings ratio (x)*   16.2  
(* on a 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. 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 74.5% of total sales in CY06 and exports constituted the remaining 25.5%. Over the years, Aventis 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 companies in the world.

What has driven performance in 1QCY07?
Revenue break-up
(Rs m) 1QCY06 1QCY07 Change
Domestic sales 1,535 1,706 11.1%
Export sales 470 423 -10.0%
Total 2,005 2,129 6.2%
The exports impact: During the quarter, Aventis’ topline grew by 6% YoY, largely driven by its domestic revenues, which were up 11% YoY. The growth in domestic sales can be attributed to the growth in revenues of the company’s leading brands such as ‘Amaryl’, ‘Cardace’, ‘Clexane’, ‘Frisium’ and ‘Rabipur’, which cater to the cardiovascular, oncology and vaccines therapeutic areas. Exports for the full year fell by 10% YoY and continue to exhibit a volatile trend. The growth in domestic sales has been in line with our estimates for CY07. We also expect exports to pick up pace going forward despite the poor performance in the first quarter.

Cost break-up
(% of sales) 1QCY06 1QCY07
(Increase)/decrease in stock in trade -11.9% -10.7%
Raw material consumption 59.8% 59.3%
Staff cost 8.9% 9.9%
Other expenditure 18.7% 18.4%
Margin pressure continues: Operating margins contracted by 130 basis points during 1QCY07, largely due to a rise in staff and raw material costs (as percentage of sales). The company has, however, managed to keep its other expenditure under control. Going forward, we do not forsee any significant margin improvement and expect operating margins to remain under pressure, which we have factored into our estimates.

Outpacing the topline: Aventis’ bottomline growth at 17% YoY during 1QCY07 outpaced the topline growth largely owing to a 108% YoY growth in other income, which included a write back of excess provision for indirect tax amounting to Rs 50 m. This was despite a higher tax outgo (the effective tax rate increased from 32% in 1QCY06 to 33% in 1QCY07).

Over the last few quarters: While revenues from domestic sales, which account for 75% of sales, have shown a consistent trend over the past few quarters, the same cannot be said for exports (25% of sales), which have been rather volatile. On the operational front, the company has been facing pressure on operating margins and we do not forsee this scenario to ease going forward.

Quarterly trend
(%) 4QCY05 1QCY06 2QCY06 3QCY06 4QCY06 1QCY07
Net sales growth -1.2% 15.2% 4.0% 8.7% 11.2% 6.2%
Operating profit margin 25.7% 25.0% 27.8% 28.3% 19.6% 23.2%
Net profit growth -7.4% 56.4% 28.4% 8.2% -7.7% 17.3%

What to expect?
At the current price of Rs 1,240, the stock is trading at a price to earnings multiple of 13.2 times our estimated CY08 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. We maintain our positive view on the stock.

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