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Aventis: Rising costs take toll - Views on News from Equitymaster

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Aventis: Rising costs take toll

May 5, 2010

Aventis has announced its 1QCY10 results. The company has reported 7% YoY growth in sales and 11% YoY decline in net profits. Here is our analysis of the results.

Performance summary
  • Net sales grow by 7% YoY during 1QCY10 led by the growth in its core pharmaceutical business.
  • Operating margins plunge by 4.6% to 19.9% during the quarter due to higher raw material and staff costs (as percentage of sales).
  • Bottomline declines by 11% YoY during the quarter due to fall in operating profits and lower other income.

(Rs m) 1QCY09 1QCY10 Change
Net sales     2,515     2,683 6.7%
Expenditure     1,899     2,150 13.2%
Operating profit (EBIDTA)        616        533 -13.5%
EBDITA margin (%) 24.5% 19.9%  
Other income          94          57 -39.4%
Depreciation          42          43 2.4%
Profit before tax        668        547 -18.1%
Tax        263        186 -29.3%
Profit after tax/(loss)        405        361 -10.9%
Net profit margin (%) 16.1% 13.5%  
No. of shares (m)       23.0       23.0  
Diluted earnings per share (Rs)         66.5  
Price to earnings ratio (x)*         28.0  
* based on trailing 12 months earnings

What has driven performance in 1QCY10?
  • Aventis clocked a 7% YoY growth in sales during 1QCY09. This was led by the strong 22% YoY growth in sales from its core pharmaceutical business. However, further growth was arrested due to the absence of sales from the vaccine ‘Rabipur' and also due to the 6% YoY decline in exports.

    Revenue break-up
    (Rs m) 1QCY09 1QCY10 Change
    Domestic sales - Others 1,621 1,972 21.7%
    Domestic sales - 'Rabipur'      92       -     
    Total domestic sales    1,713    1,972 15.1%
    Export sales    576    542 -5.9%
    Total    2,289    2,514 9.8%

  • Operating margins fell by 4.6% to 19.9% during the quarter. This was largely due to a rise in raw material costs from 44.1% in 1QCY09 to 47% in 1QCY10 (as percentage of sales). Staff costs and other expenditure also increased during the quarter to further impact operating margins. As a result, operating profits fell by 13.5% YoY during the quarter.

  • Bottomline declined by 11% YoY during the quarter due to decline in operating profits and reduction in other income. Had it not been for lower tax expenses, the fall in net profits would have been higher.

What to expect?
At the current price of Rs 1,860, the stock is trading at a multiple of 21.1 times our estimated CY12 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. However, we expect the pressure on margins to continue. Overall, current valuations do not leave much on the table for investors.

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