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Aventis: Looking even better

Aug 5, 2004

Introduction to results
MNC pharma major Aventis, declared its 2QCY04 and 1HCY04 results recently. In 2QCY04, the topline grew by 5.5% on back of a decent show in the domestic market. The net profit of the company was up 43% on back of better operational performance. For 1HCY04, sales were higher by 10%, on back of strong exports performance in the first quarter of the current year.

(Rs m) 2QCY03 2QCY04 Change 1HCY03 1HCY04 Change
Net sales 1,753 1,850 5.5% 3,200 3,528 10.3%
Other income 40 42 5.0% 68 76 11.8%
Expenditure 1,402 1,332 -5.0% 2,627 2,608 -0.7%
Operating profit (EBDITA) 351 518 47.6% 573 920 60.6%
Operating profit margin (%) 20.0% 28.0%   17.9% 26.1%  
Interest - 1   0 -  
Depreciation 45 42 -6.7% 90 84 -6.7%
Exceptional Item - -   70 68  
Profit before tax 346 518 49.6% 621 980 57.8%
Tax 113 184 62.8% 199 326 63.8%
Profit after tax/(loss) 233 334 43.1% 422 654 55.0%
Net profit margin (%) 13.3% 18.0%   13.2% 18.5%  
No. of shares (m) 23.0 23.0   23.0 23.0  
Diluted earnings per share (Rs)*       36.6 56.8  
P/E ratio (x)         13.9  
(* annualised)            

What's the company's business?
Aventis Pharma - the 50% subsidiary of Aventis SA, France is the 2nd largest pharma MNC in India with a turnover of over Rs 7 bn (CY03). It is the 6th largest domestic player with a market share of 2.9%. Aventis has relatively few but very strong brands. Over the years, it has progressively transformed itself into a company catering to the chronic (diabetes, CVS) and critical-care therapeutic segments. Apart from catering to the Indian markets, the company supplies bulk drugs to its parent, which constituted about 26% of the company's sales in 1HCY04. Recently, the parent has decided to merge with another France based pharma company, Sanofi, making it part of one of the largest pharma conglomerates.

What has driven performance in 2QCY04?
In line with expectations: Sales growth in 2QCY04 was basically driven by the decent performance in domestic market. The company's growth has been in line with the domestic market in last few quarters and it is likely to maintain this momentum going forward. The major growth drivers were the key brands such as Amaryl (18%), Cardace (13%) and Targocid (58%). Exports grew by 5.5% on back of the demand arising from higher supply to its parent company. The company's products are sold in Russia and CIS countries as well. Overall, the topline performance is in line with our full year estimates.

Better operational performance: The operating profit grew by 47.6% in the quarter under review. The key growth driver was margin expansion led by lower raw material cost and other expenses as a percentage of sales. Better product mix, which was possible due to strong focus on strategic brands and outsourcing to its parent, have assisted this performance.

Cost Structure 1HCY03 1HCY04 % sales 1HCY03 % sales 1HCY04
Raw Material 1,613 1,613 50% 46%
Staff Cost 274 305 9% 9%
Others 740 690 23% 20%
Total 2,627 2,608 82% 74%

Over the last few quarters
Over the past few quarters, the company's performance has improved with every passing quarter. While the sales growth in the last six quarters was very much dependent on the domestic market, the real kicker in 1QCY04 has come from exports, which grew by 16% YoY. However, on the operational front, the company has managed to maintain margin that are superior to the industry due to its focused business interest.

What to expect?
At Rs 791, the stock is trading at 14x annualized 1HCY04 earnings. Apart from the domestic market, which seems to be doing pretty well, Aventis has an opportunity to scale up the contribution from exports in the future i.e. outsourcing to the parent. Currently, the company is managed to grow the export side significantly and is likely to go up further, as the company is investing in capacities to capitalize on this opportunity.

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