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Aventis: Poor show continues - Views on News from Equitymaster

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Aventis: Poor show continues
May 13, 2008

Performance summary
  • Net sales grow by a staid 2% YoY during the quarter due to poor performance of the exports segment.
  • Operating margins shrink by 450 basis points (4.5%) during 1QCY08 on the back of a rise in raw material and staff costs (as percentage of sales).

  • PAT declines by 20% YoY during the quarter impacted by the steep contraction in EBDITA margins and lower other income.


Financial performance: A snapshot
(Rs m) 1QCY07 1QCY08 Change
Net sales 2,129 2,169 1.9%
Expenditure 1,635 1,764 7.9%
Operating profit (EBIDTA) 494 405 -18.0%
EBDITA margin (%) 23.2% 18.7%
Other income 200 189 -5.5%
Depreciation 45 51 13.3%
Profit before tax 649 543 -16.3%
Tax 216 198 -8.3%
Profit after tax/(loss) 433 345 -20.3%
Net profit margin (%) 20.3% 15.9%
No. of shares (m) 23.0 23.0
Diluted earnings per share (Rs)* 59.0
Price to earnings ratio (x)* 13.4
(* on a trailing 12-month basis)

What has driven performance in 1QCY08?
  • During 1QCY08, Aventisí topline grew by a muted 2% YoY due to lower sales reported by the export segment. Performance on the domestic front was also nothing much to cheer about with domestic sales growing by a mere 4% YoY. Exports continued to perform poorly, declining by 7% YoY during the quarter. While no details have been divulged, we believe that the reasons for the same are no different than in the last year, namely appreciation of the rupee against the US dollar, the preference given by some importing countries to locally manufactured products and the reduction in inventories in some importing countries due to decline in their business performance.

    Revenue break-up
    (Rs m) 1QCY07 1QCY08 Change
    Domestic sales 1,706 1,775 4.0%
    Export sales 423 394 -6.9%
    Total 2,129 2,169 1.9%

  • Operating margins continued to head southwards contracting by a substantial 4.5% during 1QCY08, largely due to a rise in raw material and staff costs (as percentage of sales). As a result, operating profits fell by a sizeable 18% YoY. Going forward, we do not foresee any significant margin improvement and expect operating margins to remain under pressure.

  • Aventisí bottomline fell by 20% YoY in 1QCY08. Besides the unenthusing performance at the operating level, the fall was further magnified by the dip in other income. Lower tax expenses could do nothing in arresting the decline in net profits.

What to expect?
At the current price of Rs 790, the stock is trading at a multiple of 8.0 times our estimated CY09 earnings. In the domestic market, Aventisí 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. 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 and has further been magnified by the sharp appreciation of the rupee against the dollar. We are in the process of updating our research report on the company.

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