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Aventis: Looking healthier

Oct 23, 2004

Performance Summary
MNC pharma major Aventis, recently announced its 3QCY04 and 9mCY04 results. During 3QCY04, the topline grew by 13.1% YoY while the bottomline grew by 63% YoY. For the first nine months of the year, while the topline growth was 11.2%, the bottomline grew by an even more impressive 73.7% as compared to same period last year. Cost cutting measures has seen the company improving its operating margins by an astonishing 1120 basis points during the third quarter.

(Rs m) 3QCY03 3QCY04 Change 9mCY03 9mCY04 Change
Net sales 1,628 1,841 13.1% 4,788 5,369 12.1%
Expenditure 1,264 1,223 -3.2% 3,852 3,831 -0.5%
Operating profit (EBDITA) 364 618 69.8% 936 1,538 64.3%
Operating profit margin (%) 22.4% 33.6%   19.5% 28.6%  
Other income 61 82 34.4% 129 158 22.5%
Interest - -   0 -  
Depreciation 38 42 10.5% 133 126 -5.3%
Exceptional Item 5 -   70 68  
Profit before tax 382 658 72.3% 1,002 1,638 63.5%
Tax 121 233 92.6% 320 559 74.7%
Profit after tax/(loss) 261 425 62.8% 682 1,079 58.2%
Net profit margin (%) 16.0% 23.1%   14.2% 20.1%  
No. of shares (m) 23.0 23.0   23.0 23.0  
Diluted earnings per share (Rs)*       59.2 62.5  
P/E ratio (x)         13.6  
(* 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 in the country. 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, thus making it part of one of the largest pharma conglomerates.

What has driven performance in 2QCY04?
Exports lead the charge: Sales growth in 3QCY04 was largely driven by strong performance on the exports front. It grew by 63% on the back of demand arising from higher supply to its parent company. The company’s products are sold in Russia and CIS countries as well. Decent performance in domestic market (6% growth) continued in this quarter too. 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 (17%), Cardace (10%), Clexane (24%) and Targocid (18%) (estimates).

Operating level boost: The operating profit grew by 70% in the quarter under review. 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 management of manufacturing expenses has also led to higher margins. Better product mix, which was possible due to strong focus on strategic brands also played its part in margin improvement.

Cost Structure 9mCY03 9mCY04 Growth
Raw Material 2,443 2,427 -1%
as % of sales 51.0% 45.2%  
Staff Cost 407 465 14%
as % of sales 8.5% 8.7%  
Others 1,002 939 -6%
as % of sales 20.9% 17.5%  
Total 3,852 3,831 -1%

Over the last few quarters
As evident from the graph below, the company’s performance has improved with every passing quarter. While 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 margins (are superior to the industry) due to its focused business interest.

What to expect?
At Rs 851, the stock is trading at 15.6x annualized 9mCY04 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. In fact Aventis is the only major MNC pharma company, which has a clear-cut strategy on out-sourcing. The company has 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. Also, there is significant opportunity for the company in terms of launching new products from its parent's portfolio once the new patent regime comes into force few months from new.

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