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Aventis Pharma: Margins slide

Jul 31, 2002

Aventis Pharma, has reported a strong topline growth for 1HFY03 on the back of strong performance of its strategic brands and jump in exports to CIS countries. The results for the relevant period under review are on a merged basis with RPR (Rhone Poulenc Rorer) and hence not exactly comparable on a like to like basis.

(Rs m) 2QFY02 2QFY03 % Change 1HFY02 1HFY03 % Change
Net Sales 1,212 1,577 30.1% 2,390 2,924 22.3%
Other Income 13 17 30.8% 55 41 -25.5%
Expenditure 969 1,317 35.9% 1,956 2,482 26.9%
Operating Profit (EBDIT) 243 260 7.0% 434 442 1.8%
Operating Profit Margin (%) 20.0% 16.5%   18.2% 15.1%
Interest 4 1 -75.0% 11 3 -72.7%
Depreciation 37 37 0.0% 75 74 -1.3%
Profit before Tax 215 239 11.2% 403 406 0.7%
Extraordinary Expenses (VRS) (40) 18 -145.0% 70 1 -98.6%
Tax 53 87 64.2% 149 130 -12.8%
Profit after Tax/(Loss) 122 170 39.3% 324 277 -14.5%
Net profit margin (%) 10.1% 10.8%   13.6% 9.5%  
No. of Shares (eoy) (m) 23 23   23 23  
Diluted Earnings per share* 21.2 29.6   28.2 24.1  
P/E (at current price)   13.0     16.0  
(*- annualised)            

Domestic sales have grown 22% from Rs 1.1 bn to Rs 1.3 bn including Rs 84 m from merger of RPR business. The performance has been on the back of strong growth in strategic products such as cardace (42% - cardiovascular), Allegra (24% - allergy), Amaryl (49% - anti-diabetes) and Targocid (40% - anti-infective). Formulations exports sales (mainly to CIS countries) have recorded a growth of more than 68%. However, the management has stated that this exports growth rate is unsustaintable going forward.

Despite strong sales growth, operating margins have been playing a spoil sport. Operating margins dropped from 18.2% in 1HFY02 to 15.1%. Though the company's products enjoy a strong brand equity, it faces stiff competition from generic products. Raw material consumption to sales ratio indicates a drop in realisations for the company's products. Further, operating margins have also been affected on account of front loading of marketing expenses for products (Lantus and Actonel) expected to be launched in the next year. The company has stated that they expect these product promotion expenses to decline in the coming quarters.

At the current market price of Rs 385, the stock trades at 12x our expected earnings for FY03. On the back of the support extended by the parent, Aventis has transformed itself from a company catering mainly to the anti-infectives and pain management segments to a company with a strong and focused portfolio of products for the chronic and critical-care therapeutic segments. The strategic brands continue to grow at healthy growth rates and this is expected to offset the impact of the laggards in its folio. This portfolio bias is expected to continue in the foreseeable future as well. Notwithstanding some unclarity on the impact of the DPCO order, valuations of the company are attractive on a peer comparision basis.

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