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Aventis: ‘India’ drives growth - Views on News from Equitymaster

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Aventis: ‘India’ drives growth

Oct 31, 2006

Performance summary
Aventis has announced mixed results for the third quarter and nine months ended September 2006. While increase in revenues from the domestic market has largely driven the topline growth, operating margins have contracted owing to a rise in other expenditure. Despite a dip in operating profits, bottomline growth has kept up pace with the topline growth backed by higher other income.

Financial performance: A snapshot
(Rs m) 3QCY05 3QCY06 Change 9mCY05 9mCY06 Change
Net sales 2,237 2,431 8.7% 6,121 6,664 8.9%
Expenditure 1,518 1,744 14.9% 4,383 4,856 10.8%
Operating profit (EBIDTA) 719 687 -4.5% 1,738 1,808 4.0%
EBDITA margin (%) 32.1% 28.3%   28.4% 27.1%  
Other income 78 156 100.0% 213 332 55.9%
Depreciation 43 43 0.0% 130 128 -1.5%
Interest - -   - 1  
Profit before tax 754 800 6.1% 1,821 2,011 10.4%
Tax 257 262 1.9% 746 665 -10.9%
Profit after tax/(loss) 497 538 8.2% 1,075 1,346 25.2%
Net profit margin (%) 22.2% 22.1%   17.6% 20.2%  
No. of shares (m) 23.0 23.0   23.0 23.0  
Diluted earnings per share (Rs)*         74.9  
Price to earnings ratio (x)*         20.2  
(* on a trailing 12-month basis)

What is the company’s business?
Aventis Pharma, the 50% subsidiary of Aventis SA, France, is the second largest pharma MNC in India. It is the eighth largest player in India with a market share of 2.9%. Aventis has relatively few but very strong brands in the country. Domestic sales constituted 76% of total sales in 9mCY06 and exports constituted the remaining 24%. Over the years, Aventis 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, Aventis supplies bulk drugs to its parent. In CY04, the parent merged with another France based pharma company, Sanofi, thus making it part of one of the largest pharma companies in the world.

What has driven performance in 3QCY06?
Subdued revenue growth: During the quarter, Aventis’ topline grew by 9% YoY largely driven by its domestic revenues, which were up 15% YoY. The strong growth in domestic sales can be attributed to the growth in revenues of the company’s leading brands such as ‘Amaryl, ‘Cardace’, ‘Clexane’, ‘Frisium’ and ‘Rabipur’. For the nine-month period, domestic sales have grown by 16% YoY, which is in line with our estimates. However, exports revenues for the quarter and nine month period continued to be a laggard, declining by 6% YoY and 9% YoY respectively, as a result of which we shall have to downgrade our estimates for this business for the year.

Higher other expenses dent margins: Operating margins contracted during the quarter, largely due to a rise in other expenditure and staff costs (as a percentage of sales). The company, however, managed to keep its raw material costs under control. Going forward, we do not forsee any significant margin improvement and expect operating margins to remain under pressure.

Cost break-up
(% of sales) 3QCY05 3QCY06 9mCY05 9mCY06
(Increase)/decrease in stock in trade -2.6% -4.8% -5.2% -4.2%
Raw material consumption 48.1% 51.5% 52.8% 51.5%
Staff cost 7.9% 8.4% 8.9% 8.7%
Other expenditure 14.5% 16.7% 15.1% 16.9%

In line with the topline: Aventis’ bottomline growth at 8% YoY has managed to keep pace with the topline growth largely owing to a 100% YoY growth in other income and a lower tax outgo. It must be noted that the effective tax rate reduced from 34% in 3QCY05 to 33% in 3QCY06.

Over the last few quarters: There has been volatility in Aventis’ revenues in the past few quarters due to the VAT effect and pressure on export revenues. On the operational front, though the company has managed to maintain operating margins above the 25% levels, we expect the same to be under pressure going forward. This is due to the fact that the company will not benefit anymore from the restructuring exercise that had helped expand margins in CY04.

Quarterly trend
(%) 2QCY05 3QCY05 4QCY05 1QCY06 2QCY06 3QCY06
Net sales growth 15.8% 21.5% -1.2% 15.2% 4.0% 8.7%
Operating profit margin 29.1% 32.1% 25.7% 25.0% 27.8% 28.3%
Net profit growth 2.4% 16.9% -7.4% 56.4% 28.4% 8.2%

What to expect?
At the current price of Rs 1,512, the stock is trading at a price to earnings multiple of 17.7 times our estimated CY07 earnings. In the domestic market, Aventis’ strong presence in the fast-growing lifestyle segment along with its focus on strategic brands are expected to be the key growth drivers going forward. The company, so far, has also been aggressive in launching new products and is therefore likely to be a major beneficiary in the product patent regime. The company has undertaken several brand awareness initiatives over the years, which will augur well in terms of increased visibility for its products. However, the same is expected to pressurise margins going forward. Investors should note that while the domestic sales are in line with our estimates, the export numbers have been below expectations and we shall have to downgrade our estimates accordingly. Nevertheless, we maintain our positive view on the stock.

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