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Aventis - VAT clouds growth

Apr 29, 2003

Aventis Pharma, one of the major MNC players in the country, has posted an impressive performance for the first quarter ended March 2003. After restructuring its operations (includes exiting from non-profitable brands) that led to a fall in net profit in FY03, there is an overall improvement in revenue and margin expansion.

(Rs m) 1QFY03 1QFY04 Change
Net sales 1,378 1,447 5.0%
Other Income 24 28 16.7%
Expenditure 1,196 1,225 2.4%
Operating Profit (EBDIT) 182 222 22.0%
Operating Profit Margin (%) 13.2% 15.3%  
Interest 2 - -
Depreciation 37 40 8.1%
Profit before Tax 167 210 25.7%
Extraordinary items (17) 65 -
Tax 43 85 97.7%
Profit after Tax/(Loss) 107 190 77.6%
Net profit margin (%) 7.8% 13.1%  
No. of Shares (m) 23.0 23.0  
Diluted Earnings per share* 18.6 33.0  
P/E Ratio (x)   7.9  
(* annualised)      

Aventis derives a significant portion of its revenues from the domestic market by launching products from the parent company's strong brand portfolio (77% of revenues in 1QFY04). Despite uncertainties regarding the shift to the Value Add Tax (VAT) based regime, domestic sales of the company grew by 5% during the quarter. The impact of the VAT imbroglio can be visualised from the fact that domestic sales in 4QFY03 i.e. Oct-Dec 2002 grew by 15% (9% in 3QFY03, 22% in 2QFY03 and 10% in 1QFY03). In this context, growth in 1QFY04 is on the lower side. That said, domestic growth stands at 7%, if one were to adjust from brands that were discontinued last year (i.e. products like 'Tavanic'). Coming to individual brands, strategic brands like Clexane (34%), Cardace (26%), Amaryl (25%) and Targocid (33%) performed well in the same period, reflecting the strong brand equity.

Exports, which account for the remaining 23% of Aventis's revenues, was also affected due to changes in regulatory environment in Russia and CIS countries. We had mentioned this as a cause of concern in our research report on the company. The company expects an improvement in exports going forward, which will also be a factor of higher outsourcing possibilities from its parent company for 'Daonil', an anti-diabetic medicine.

Operating margins in 1QFY04 has shown a marked improvement. But one has also got to be remember that in 1QFY03, operating margins dropped by 260 basis points on account of front-loading of medico-marketing expenses. Nevertheless, we expect this improvement in margins to sustain in the coming quarters also, as benefits from recovery in exports and exit from non-profitable brands will add to the growth in profits.

Despite a 22% growth in operating profit, net profit growth (without accounting for extraordinary items in both the quarters) is flat in 1QFY04. Extraordinary item here pertains to special discount received from dealers and amortisation of technical and marketing rights for some of its products.

The stock currently trades at Rs 271 implying a P/E multiple of 7.9x annualised 1QFY04 earnings. As far as growth in domestic market is concerned, Aventis has indicated the launch of Lantus (long acting Insulin) and Actonel (osteoporosis drug) in mid to late 2003. This is in line with the company's parental support. That said, the company has indicated that the ongoing deliberations over the implementation of VAT is likely to have a negative impact on its revenues, if the issue remains status quo. Though the stock has risen 4% on the back of 1QFY04 results, one has to wait and watch as to how the VAT issue unfolds. This is of significance for Aventis because the company derives 77% of its revenues from the domestic market. But over the long term, continuing parental support, higher export possibilities in Russia and CIS countries combined with the company's strong but focused product portfolio are in its favour.

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