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Aventis: Dismal show yet again - Views on News from Equitymaster
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Aventis: Dismal show yet again
Jul 19, 2007

Performance summary
  • Net sales grow by a subdued 3% YoY during the quarter, largely due to the 9% YoY decline in export sales

  • Operating margins shrink by 800 basis points (8%) on the back of a rise in raw material costs, staff costs and other expenditure (as percentage of sales)

  • PAT declines by 15% YoY impacted by the contraction in EBDITA margins and the staid revenue growth despite the higher other income

  • Declares interim dividend of Rs 3.5 per share – dividend yield of 0.3%.

Financial performance: A snapshot
(Rs m) 2QCY06 2QCY07 Change 1HCY06 1HCY07 Change
Net sales 2,228 2,302 3.3% 4,233 4,431 4.7%
Expenditure 1,619 1,857 14.7% 3,132 3,492 11.5%
Operating profit (EBIDTA) 609 445 -26.9% 1,101 939 -14.7%
EBDITA margin (%) 27.3% 19.3%   26.0% 21.2%  
Other income 100 182 82.0% 196 382 94.9%
Depreciation 42 47 11.9% 85 92 8.2%
Interest 1 -   1 -  
Profit before tax 666 580 -12.9% 1,211 1,229 1.5%
Tax 227 207 -8.8% 403 423 5.0%
Profit after tax/(loss) 439 373 -15.0% 808 806 -0.2%
Net profit margin (%) 19.7% 16.2%   19.1% 18.2%  
No. of shares (m) 23.0 23.0   23.0 23.0  
Diluted earnings per share (Rs)*         73.5  
Price to earnings ratio (x)*         18.8  
(* on a trailing 12-month basis)

What is the company’s business?
Aventis Pharma, the 50% subsidiary of Aventis SA, France, is the second largest pharma MNC in India. It is the eighth largest player in India with a market share of 2.9%. Aventis has relatively few but very strong brands in the country. Domestic sales constituted 80% of total sales in 1HCY07 and exports constituted the remaining 20%. Over the years, Aventis has progressively transformed itself into a company catering to the chronic (diabetes, cardio vascular) and critical-care therapeutic segments. Apart from catering to the Indian markets, Aventis supplies bulk drugs to its parent. In CY04, the parent merged with another France based pharma company, Sanofi, thus making it part of one of the largest pharma companies in the world.

What has driven performance in 2QCY07?
Revenues – Not much to cheer about: During the quarter, Aventis’ topline grew by a staid 3% YoY, largely driven by its domestic revenues, which were up 7% YoY. The subdued growth in domestic revenues was attributed to Aventis receiving lower supplies of the anti-rabies vaccine ‘Rabipur’ due to production issues in the manufacturer's plant. As a result, the expected revenue growth of ‘Rabipur’ could not be achieved. Exports continued to perform poorly declining by 9% YoY during the second quarter and by 10% YoY in 1HCY07. While the company has not divulged the reason for this decline, the same can be attributed to lower sales to Russia; a trend which the company had also faced in CY06.

Revenue break-up
(Rs m) 2QCY06 2QCY07 Change 1HCY06 1HCY07 Change
Domestic sales 1,712 1,833 7.1% 3,247 3,539 9.0%
Export sales 516 469 -9.1% 986 892 -9.5%
Total 2,228 2,302 3.3% 4,233 4,431 4.7%

Margin pressure continues: Operating margins contracted by a substantial 800 basis points (8%) YoY during 2QCY07, largely due to a rise in staff, raw material costs and other expenditure (as percentage of sales). As a result, operating profits fell by 27% YoY. Having said that, while we have factored in a fall in operating margins in CY07, the fall in 1HCY07 has been higher than our estimates. Also, going forward, we do not foresee any significant margin improvement and expect operating margins to remain under pressure.

Cost break-up
(% of sales) 2QCY06 2QCY07 1HCY06 1HCY07
(Increase)/decrease in stock in trade 3.4% 4.2% -3.8% -3.0%
Raw material consumption 44.3% 45.1% 51.6% 51.9%
Staff cost 8.8% 12.2% 8.8% 11.1%
Other expenditure 16.2% 19.2% 17.4% 18.8%

Bottomline blues: Aventis’ bottomline fell by 15% YoY in 2QCY07. This decline was much lesser than the fall in operating profits on account of the higher other income (up 82% YoY). A lower tax outgo (down 9% YoY) also helped matters to a certain extent. The performance in 1HCY07, however, was a bit better. Since the operating profits declined by a relatively slower 15% YoY, the bottomline growth during this period remained flat.

Over the last few quarters: Aventis, in the past few quarters, has been reporting sluggish sales, which has largely been due to the poor show put up by exports. Having said that, we expect the domestic business to report strong growth going forward given the company’s strong presence in the chronic therapy segment and introduction of new products. On the operational front, the company has been facing pressure on operating margins and we do not forsee this scenario to ease going forward.

Quarterly trend
(%) 1QCY06 2QCY06 3QCY06 4QCY06 1QCY07 2QCY07
Net sales growth 15.2% 4.0% 8.7% 11.2% 6.2% 3.3%
Operating profit margin 25.0% 27.8% 28.3% 19.6% 23.2% 19.3%
Net profit growth 56.4% 28.4% 8.2% -7.7% 17.3% -15.0%

What to expect?
At the current price of Rs 1,381, the stock is trading at a price to earnings multiple of 16.1 times our estimated CY08 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. The company, so far, has also been aggressive in launching new products and is therefore likely to be a major beneficiary now that the product patent regime has come into force. The company has undertaken several brand awareness initiatives over the years, which will augur well in terms of increased visibility for its products. 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. Overall we maintain our positive view on the stock.

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