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Aventis: ‘Tax’ing growth! - Views on News from Equitymaster
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Aventis: ‘Tax’ing growth!
Aug 5, 2005

Performance summary
Aventis Pharma had recently announced its results for the second quarter and first half ended June 2005. While the topline registered a strong growth on the back of higher export sales and increased sales of its strategic brands, the bottomline growth was lacklustre during the quarter, on the back of a higher tax outgo. Margins, however, expanded for both the periods.

Financial performance: A snapshot
(Rs m) 2QCY04 2QCY05 Change 1HCY04 1HCY05 Change
Net sales 1,850 2,143 15.8% 3,528 3,884 10.1%
Expenditure 1,336 1,519 13.7% 2,612 2,865 9.7%
Operating profit (EBDITA) 514 624 21.4% 916 1,019 11.2%
EBDITA margin (%) 27.8% 29.1%   26.0% 26.2%  
Other income 46 61 32.6% 80 135 68.8%
Depreciation 42 43 2.4% 84 87 3.6%
Profit before tax 518 642 23.9% 912 1,067 17.0%
Exceptional item - -   68 -  
Tax 184 300 63.0% 326 489 50.0%
Profit after tax/(loss) 334 342 2.4% 654 578 -11.6%
Net profit margin (%) 18.1% 16.0%   18.5% 14.9%  
No. of shares (m) 23.0 23.0   23.0 23.0  
Diluted earnings per share (Rs)*       56.9 50.3  
Price to earnings ratio (x)         27.9  
(* annualised)            

What is the company’s business?
Aventis Pharma, the 50% subsidiary of Aventis SA, France, is the second largest pharma MNC in India with a turnover of over Rs 7.4 bn (CY04). It is the 8th largest domestic player with a market share of 2.9%. Aventis has relatively few but very strong brands in the country. Domestic sales constituted 74% of total sales in 2004 and exports constituted the remaining 26%. Over the years, it 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, the company supplies bulk drugs to its parent. Recently, the parent merged with another France based pharma company, Sanofi, thus making it part of one of the largest pharma conglomerates in the world.

What has driven performance in 2QCY05?
Robust revenue growth:  In the previous quarter (1QCY05), Aventis’ revenues increased by a subdued 4% YoY on the back of lower purchases by distributors in anticipation of implementation of VAT with effect from April 1, 2005. However, in 2QCY05, there was a recovery in revenues, which clocked a healthy 16% YoY growth. This could be attributed to the strong growth in export sales. Exports grew by 21% YoY during the quarter on the back of demand arising from higher supply to the parent. The company’s products are sold in Russia and CIS countries as well. Domestic sales also recorded a strong 14% YoY growth, after declining by 3% YoY in 1QCY05. As far as the products are concerned, major growth drivers were the key brands such as Amaryl (23%), Cardace (23%), Clexane (22%), Avil (25%) and Rabipur (35%).

Cost break-up
(% of sales) 2QCY04 2QCY05 1HCY04 1HCY05
(Increase)/decrease in stock in trade -4.2% 3.5% -10.2% -6.8%
Raw material consumption 46.5% 44.9% 57.9% 55.6%
Staff cost 8.6% 8.6% 8.6% 9.5%
Other expenditure 17.1% 13.9% 17.7% 15.5%

Operating level boost:  Operating margins improved by 110 basis points in 2CY05. Lower raw material cost and other expenses as a percentage of sales were largely responsible for the margin improvement. The increasing share of outsourcing (export sales) and better product mix, which was possible due to strong focus on strategic brands also played its part in margin improvement.

Subdued bottomline:  The gains made by Aventis on the back of strong revenues and operating margin improvement was offset by a higher tax outgo. As a result, the bottomline recorded a marginal 2% YoY growth. Even a 33% YoY rise in other income did not help the company boost its bottomline.

Over the last few quarters:  There has been a consistency in Aventis’ revenues with the exception of 1QCY05, wherein sales had taken a hit. On the operational front, margins have also consistently been well above the 25% level due to its focused business interest.

Quarterly trends
(%) 1QCY04 2QCY04 3QCY04 4QCY04 1QCY05 2QCY05
Net sales growth 16.0% 5.5% 13.1% 14.6% 3.8% 15.8%
Operating profit margin 24.0% 28.0% 33.6% 30.6% 26.9% 29.1%
Net profit growth 68.4% 43.1% 62.8% 33.6% -26.3% 2.4%

What to expect?
At the current price of Rs 1,400, the stock is trading at a price to earnings multiple of 27.9 times its annualised 1HCY05 earnings, which is at the higher end of the valuation spectrum. The management has declared a dividend of Rs. 3.5 per share (dividend yield of 0.2%). 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. In fact, Aventis is the only MNC pharma major, which has a clear-cut strategy on outsourcing.

The company is also aggressive as far as launching new products are concerned and will therefore be a major beneficiary in the patent regime when a slew of new products will be unveiled for the Indian markets. The company has also undertaken several brand awareness initiatives over the years, which will augur well in terms of increased visibility for their products. We remain positive on the company from a long-term perspective.

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