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Aventis: Other income offsets margin compression - Views on News from Equitymaster
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Aventis: Other income offsets margin compression
Aug 20, 2011

Aventis has announced its 2QCY11 results. The company has reported 11.8% YoY growth in sales and 17.2% YoY growth in net profits. Here is our analysis of the results.

Performance summary
  • Net sales grow by 11.8% YoY led by the growth in its core pharmaceutical business.
  • Operating margins decrease by 1.5% to 21.5% during the quarter especially due to a steep rise in other expenditure (as percentage of sales).
  • Net profits increase by 17% YoY during the quarter due to huge increase in other income

Financial performance: A snapshot
(Rs m) 2QCY11 2QCY12 Change 1HCY11 1HCY12 Change
Net sales 2,905 3,249 11.8% 5,588 6,217 11.3%
Expenditure 2,280 2,600 14.0% 4,430 4,928 11.2%
Operating profit (EBIDTA) 625 649 3.8% 1,158 1,289 11.3%
EBDITA margin (%) 21.5% 20.0%   20.7% 20.7%  
Other income 63 140 122.2% 120 312 160.0%
Depreciation 47 54 14.9% 90 108 20.0%
Interest - -   - -  
Profit before tax 641 735 14.7% 1,188 1,493 25.7%
Tax 217 238 9.7% 403 490 21.6%
Exceptional Gain / (Loss) - -   - -  
Forex Gain / (Loss) - -   - -  
Minority Interest - -   - -  
Profit after tax/(loss) 424 497 17.2% 785 1,003 27.8%
Net profit margin (%) 14.6% 15.3%   14.0% 16.1%  
No. of shares (m) 23 23        
Diluted earnings per share (Rs) 18 22        
Price to earnings ratio (x)*   27.0        
*On trailing 12 month basis

What has driven performance in 2QCY11?
  • Aventis clocked 11.8% YoY growth in sales during 2QCY11. This was led by a satisfactory double digit growth in its domestic pharmaceutical business. Further, exports, which have otherwise performed erratically during the previous quarters, also increased by 9.3% YoY.
  • Revenue break-up
    (Rs m) 2QCY11 2QCY12 Change 1HCY11 1HCY12 Change
    Domestic Sales-Others 2,177 2,440 12.1% 4,150 4,661 12.3%
    Export Sales 538 588 9.3% 1,079 1,130 4.7%
    Total sales 2,715 3,028 11.5% 5,229 5,791 10.7%

  • Operating margins decreased by 1.5% to 20% during the quarter. This was largely due to the increase in other expenditure. However, the reduction in raw material costs (from 47% in 2QCY10 to 46.4% in 2QCY11) and staff costs (both as percentage of sales) helped cushion the margins.

  • Net profits grew by 17% YoY during the quarter due to huge increase in other income. The other income trebled to Rs 172 m.

What to expect?

At the current price of Rs 2,075, the stock is trading at a price to earnings multiple of 22.3 times our estimated CY13 earnings. In the domestic market, Aventis has strong presence in the fast-growing lifestyle segment. Its focus on strategic brands and new products launches for tier II market is expected to be the key growth drivers going forward. The management also plans to increase exports. However, while the margin pressure as seen in this quarter is expected to continue for some time, overall, we expect margins to remain stable over the next three years. We also believe that the company will be a key beneficiary of the patent regime of India as the parent has a strong research pipeline with 55 products undergoing clinical trials. Overall, at this time, current valuations do not leave much on the table for investors.

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