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Aventis: Higher depreciation hits profit
May 9, 2012

Aventis has announced its first quarter results for calendar year 2012. The company has reported 16.4% YoY growth in sales and 20.8% YoY fall in net profits. Here is our analysis of the results.

Performance summary
  • Net sales grow by 16.4% YoY led by growth in its domestic pharmaceutical business
  • Operating margins decrease by 70 bps (0.7%) to 20.9% due to rise in employee costs
  • Net profits fall by 20.8% YoY on account of lower margins, decrease in other income and a huge increase in depreciation charges.

Financial performance: A snapshot
(Rs m) 1QCY11 1QCY12 Change
Net sales 2,970 3,457 16.4%
Expenditure 2,328 2,733 17.4%
Operating profit (EBIDTA) 642 724 12.8%
EBDITA margin (%) 21.6% 20.9%  
Other income 172 57 -66.9%
Depreciation 54 183 238.9%
Interest 2 4 100.0%
Profit before tax 758 594 -21.6%
Tax 252 193 -23.4%
Exceptional Gain / (Loss) - -  
Forex Gain / (Loss) - -  
Minority Interest - -  
Profit after tax/(loss) 506 401 -20.8%
Net profit margin (%) 17% 12%  
No. of shares (m) 23 23  
Diluted earnings per share (Rs)   78  
Price to earnings ratio (x)*   28  
*On trailing 12 month basis

What has driven performance in 1QCY12?
  • Aventis clocked 16.4% YoY growth in sales during 1QCY12 mainly led by growth in its domestic business.

  • Operating margins decreased by 70 bps to 20.9% during the quarter. This was largely due to the increase in employee costs which rose by 50 bps (as a percentage of sales).

  • Net profits fell by 20% YoY on account of lower other income and higher depreciation charges. The other income decreased by 67% YoY and the depreciation increased by 238% YoY. Both of this was on account of acquisition of Universal brands which resulted in the use of excess cash and increased the depreciation/amortization costs. This goodwill created after the acquisition will be amortized over a period of 10 years.

What to expect?
At the current price of Rs 2,200, the stock is trading at a price to earnings multiple of 23.6 times our estimated CY13 earnings. In the domestic market, Aventis has a strong presence in the fast-growing lifestyle segment. Its focus on strategic brands and new products launches for tier II market is expected to be the key growth drivers going forward. Further there is a possibility of increasing revenues due to the consolidation of Universal brands; however, it has not been seen in the current quarter. We will be updating our research report on the company soon. However, at this time, current valuations do not leave much on the table for investors.

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