The results declared by Aventis pharma generate mixed reactions. While sales growth for the company has been better than expected, a fairly sharp drop in margins is discouraging. The company has recorded a sales growth of 14% from Rs 1.3 bn to Rs 1.5 bn in the first quarter of current year (FY03). However, the results for FY03 are on a merged basis with Rhone Poulenc Rorer (RPR) and hence not exactly comparable.
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Sales growth has been mainly fuelled by 32% rise in exports, mainly bulk exports to Russian and CIS countries. Contribution of exports to total sales has jumped from 18% in FY02 to 21% in 1QFY03. Encouragingly, domestic sales growth of 10% has outpaced pharma industry growth rate. The key strategic products viz, Cardace (45%), Amaryl (50%) and Allegra (26%) continued to log healthy growth rates. The drop in operating margins was mainly on the back of integration of low margin RPR business and higher provisioning for marketing expenses. Operating margins recorded a 260 basis points decline from 15% to 12%.
The product introduction from the parent company has remained strong in case of Aventis Pharma. With the merger of its subsidiary Rhone Poulenc Rorer, Aventis Pharma product portfolio now boasts of 11 of the top 14 products of the parent company. The parent company is also expected to launch its new anti-diabetes product 'Lantus' in mid 2003. 'Lantus' has already met with good success in US and Europe.
At the current market price of Rs 435, the stock trades at a P/e of 13x its FY03 expected earnings. The stock price of the company has run up on the back of strong performance recorded by the company for FY02. However, valuations are still at a discount when compared to its peers mainly due to lack of clarity over the recent DPCO order. While it would be futile to bet over the exact implications of the DPCO order, the negatives seem to be discounted in the current price. Any positive development on this front, could be a strong point for a re-rating of the stock. While we would consider revising our profit estimates down on the back of drop in margins, we expect margins to improve in the coming quarters on the back of changing therapeutic mix of the company and strong product flow from the parent's stable.
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