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Aventis: No relief - Views on News from Equitymaster
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Aventis: No relief
Nov 14, 2007

Performance summary
  • Net sales fall by 7% YoY during the quarter due to lower sales reported by both the domestic and export segments.

  • Operating margins shrink by 860 basis points (8.6%) on the back of a rise in raw material costs, staff costs and other expenditure (as percentage of sales).

  • PAT declines by 32% YoY impacted by the contraction in EBDITA margins and fall in revenues despite lower tax expenses and higher other income.

Financial performance: A snapshot
(Rs m) 3QCY06 3QCY07 Change 9mCY06 9mCY07 Change
Net sales 2,431 2,264 -6.9% 6,664 6,695 0.5%
Expenditure 1,744 1,818 4.2% 4,876 5,310 8.9%
Operating profit (EBIDTA) 687 446 -35.1% 1,788 1,385 -22.5%
EBDITA margin (%) 28.3% 19.7%   26.8% 20.7%  
Other income 156 176 12.8% 352 558 58.5%
Depreciation 43 47 9.3% 128 139 8.6%
Interest - 2   1 2 100.0%
Profit before tax 800 573 -28.4% 2,011 1,802 -10.4%
Tax 262 205 -21.8% 665 628 -5.6%
Profit after tax/(loss) 538 368 -31.6% 1,346 1,174 -12.8%
Net profit margin (%) 22.1% 16.3%   20.2% 17.5%  
No. of shares (m) 23.0 23.0   23.0 23.0  
Diluted earnings per share (Rs)*         66.1  
Price to earnings ratio (x)*         14.9  
(* 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 80% of total sales in 1HCY07 and exports constituted the remaining 20%. 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 3QCY07?
Revenues – Decline in both the segments: During the quarter, Aventis’ topline declined by 7% YoY due to lower sales reported by both the domestic and export segments. The 1% YoY fall in domestic revenues was attributed to Aventis receiving significantly lower supplies of the anti-rabies vaccine ‘Rabipur’ due to production issues in the manufacturer's plant. As a result, the expected revenue growth of ‘Rabipur’ could not be achieved. Exports continued to perform poorly declining by 24% YoY during the third quarter and by 15% YoY in 9mCY07. The company attributed this to the appreciation of the rupee against the US dollar, the preference given by some importing countries to locally manufactured products and the reduction in inventories in some importing countries due to decline in their business performance. Given the poor performance reported by Aventis, we shall have to downgrade our revenue estimates for the year accordingly.

Revenue break-up
(Rs m) 3QCY06 3QCY07 Change 9mCY06 9mCY07 Change
Domestic sales 1,795 1,783 -0.7% 5,042 5,322 5.6%
Export sales 636 481 -24.4% 1,622 1,373 -15.4%
Total 2,431 2,264 -6.9% 6,664 6,695 0.5%

Margin pressure continues: Operating margins contracted by a substantial 860 basis points (8.6%) during 3QCY07, largely due to a rise in staff, raw material costs and other expenditure (as percentage of sales). As a result, operating profits fell by a sizeable 35% YoY. Having said that, while we have factored in a fall in operating margins in CY07, the fall in 9mCY07 has been higher than our estimates. Also, going forward, we do not foresee any significant margin improvement and expect operating margins to remain under pressure.

Cost break-up
(% of sales) 3QCY06 3QCY07 9mCY06 9mCY07
(Increase)/decrease in stock in trade -3.5% -0.8% -2.5% -1.4%
Raw material consumption 30.6% 30.3% 29.8% 32.4%
Purchase of finished goods 20.2% 19.1% 20.3% 17.9%
Staff cost 8.4% 10.9% 8.7% 11.0%
Other expenditure 16.3% 20.7% 17.0% 19.4%

Bottomline blues: Aventis’ bottomline fell by 32% YoY in 3QCY07. This decline was relatively lesser than the fall in operating profits on account of the higher other income (up 13% YoY). A lower tax outgo (down 22% YoY) also helped matters to a large extent. The performance in 9mCY07, however, was a bit better. Since the operating profits declined by a relatively slower 23% YoY, the bottomline fell by 13% YoY. A robust 59% YoY growth in other income was instrumental in cushioning the drop in the bottomline during 9mCY07.

Over the last few quarters: Aventis, in the past few quarters, has been reporting sluggish sales, which has largely been due to the poor show put up by exports. For most of the MNC pharma companies of late, supply related issues with respect to key products have impacted topline performance and Aventis has not been spared either. On the operational front, the company has been facing pressure on operating margins and we do not forsee this scenario to ease going forward.

Quarterly trend
(%) 2QCY06 3QCY06 4QCY06 1QCY07 2QCY07 3QCY07
Net sales growth 4.0% 8.7% 11.2% 6.2% 3.3% -6.9%
Operating profit margin 27.8% 28.3% 19.6% 23.2% 19.3% 19.7%
Net profit growth 28.4% 8.2% -7.7% 17.3% -15.0% -31.6%

What to expect?
At the current price of Rs 987, the stock is trading at a price to earnings multiple of 10.5 times our estimated CY09 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 now that the product patent regime has come into force. The company has undertaken several brand awareness initiatives over the years, which will augur well in terms of increased visibility for its products.

Having said that, we expect the pressure on margins to continue going forward. Also, the inconsistent growth in export sales continues to remain a cause for concern and has further been magnified by the sharp appreciation of the rupee against the dollar. Supply related issues with respect to ‘Rabipur’ have dented the topline performance as a result of which we shall have to downgrade our topline estimates for the year. We shall soon update our research report on the company.

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Feb 21, 2018 11:01 AM


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