Aventis Pharma – 4QCY2010 Result Update - Angel Broking

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Aventis Pharma – 4QCY2010 Result Update

Angel Broking maintains a Neutral on Aventis Pharma.

For 4QCY2010, Aventis Pharma (Aventis) reported higher-than-expected results
on the top-line front. However, the company disappointed on the margin front,
which led to lower-than-expected reported net profit during the quarter. Domestic
sales grew by healthy 22.5% accompanied with 15% growth on the export front.
Aventis incurred planned expenditure in two critical projects–slated to be the
future growth drivers–viz. Prayas, a project to deliver high-quality, low-cost health
care to the rural population; and entry into the over-the-counter (OTC) market,
expected to deliver long-term prospects for Aventis. We have revised our
estimates but we remain Neutral on the stock.

Revenue growth led by the domestic segment: The company’s net sales grew by
21% yoy to `287cr (`237cr) for the quarter, higher than our estimates of `263cr
on the back of strong 22.5% growth in the domestic segment. Export sales grew
by healthy 15.1% to `62.5cr (`54.3cr), in line with our estimates. Aventis reported
gross margin at 50% (47%) yoy, lower than our estimates of 55%. OPM came in
at 7.2% (6.9%) for the quarter, impacted by higher employee and other expenses.
For the quarter, Aventis reported net profit of `29.2cr (`26cr), up 12.3% yoy, and
lower than our estimate of `36.5cr. However, including the exceptional item
amounting to `75.7cr on account of the Chiron sale, net profit came in at `105cr
(`26cr), reporting an increase of 303.5% yoy.
Outlook and valuation: We expect net sales to post a 12.8% CAGR to `1,380cr
and EPS to register a 15.4% CAGR to `89.3cr over CY2010–12. At current levels,
the stock is trading at 22.1x and 20.7x CY2011E and CY2012E earnings,
respectively. We have revised our estimates but remain Neutral on the stock.

Revenue growth led by the domestic segment: The company’s net sales grew by

21% yoy to `287cr (`237cr) for the quarter, higher than our estimates of `263cr,

on the back of strong 22.5% growth in the domestic segment. Export sales grew by

healthy 15.1% to `62.5cr (`54.3cr), in line with our estimates.

Aventis incurred planned expenditure of two critical projects – slated to be the

growth drivers – Prayas, a project to deliver high-quality, low-cost health care to

the rural population; and entered into the OTC market. These projects are

expected to deliver long-term prospects to Aventis.

OPM remains flat: Aventis reported gross margins at 50% (47%) yoy, lower than

our estimates of 55%, impacted by increased material costs. OPM came in at 7.2%

(6.9%) for the quarter, led by higher employee and other expenses to `45.5cr

(`38.2cr) and `76.5cr (`57.8cr), an increase of 19% and 32% yoy, respectively.

Bottom line below estimates: For the quarter, Aventis reported net profit of `29.2cr

(`26cr), up 8.0% yoy, and lower than our estimate of `36.5cr. However, including

the exceptional item amounting to `75.7cr on account of the Chiron sale, net

profit came in at `105cr (`26cr), up 303.5% yoy.

Recommendation rationale

Focus on top-line growth: Aventis recorded single-digit revenue CAGR of 3% to

`974cr over CY2006–09 on the back of slower-than-expected growth on the

domestic formulation front and loss of distribution rights of Rabipur vaccine. Going

forward, to grow in line with the industry’s average in the domestic segment,

Aventis has rolled out its Prayas project, an initiative to increase its penetration in

rural areas. Under the project, the company would launch low-price products in

the anti-infective and NSAID therapeutic segments and increase its field force. The

project is expected to provide incremental revenue of `500cr over the next five

years. Aventis also plans to launch CVS and vaccine products in the domestic

market post the acquisition of Shantha Biotech by its parent company. We expect

the company’s net sales to log a 12.8% CAGR over CY2010–12, driven by its

domestic formulation sales.

Valuation: Aventis has a strong balance sheet with cash of `586cr (~14% of

market cap, as of CY2009), which could be used for future acquisitions or higher

dividend payouts. We expect net sales to post a 12.8% CAGR to `1,380cr and EPS

to register a 15.4% CAGR to `89.3cr over CY2010–12. At current levels, the stock

is trading at 22.1x and 20.7x CY2011E and CY2012E earnings, respectively.

We have revised our estimates but remain Neutral on the stock.