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Nath Balakrishnan

FRESH exposure can be considered in the stock of Aventis Pharma. Our latest recommendation represents a continuation of the bullish stance that we have had on the stock over the past couple of years.

In our view, Aventis has the best potential among stocks belonging to the MNC pharma universe. At the current market price of Rs 1,290, the stock trades at about 18 times its expected per-share earnings for the current calendar.

The de-stocking resorted to by members of trade against the backdrop of the value-added tax implementation may take the sheen of the first quarter numbers. Should the stock see some weakness post the announcement of its earnings, it could be used as an opportunity to step up exposure in the stock.

It has been yet another stellar performance from Aventis for the year-ended December 2004, building on the gains it posted the previous calendar. Revenues for the year at Rs 735 crore were up 13 per cent compared to the year-ago period; exports, driven by the outsourcing of Daonil (an anti-diabetic), grew 31 per cent at Rs 204 crore.

The story on the operating margins front continues to be impressive. Since embarking on a programme to cut costs and sharpen its focus on strategic brands, Aventis' margins have been on an upward trajectory over the past two years.

The efforts of the restructuring exercise have paid off handsomely in the fiscal just ended, with margins moving up sharply by close to eight percentage points at 29 per cent, which puts it well ahead of its frontline MNC peers such as GlaxoSmithKline and Pfizer.

The strong operational buoyancy is set to continue, given Aventis' inherent strengths in key cardiovascular and diabetes therapy segments.

Backed by a strong marketing set up, key brands such as Clexane, Targocid and Amaryl have logged good growth rates. We also believe that Aventis' close alignment with its parent will stand it in good stead in the extant product patent regime.

Aventis has always tapped into its parent's pipeline for product launches even prior to the product patent regime (the launch of Lantus in July 2003, a once-a-day basal insulin, is an example); the current regime should only provide an environment that is more conducive to launch patent-protected products.

With Aventis and Sanofi merging at the global level, the same arrangement will also be replicated in India.

Though Aventis' domestic marketing strengths should make it the preferred vehicle for launching products, any the move to route products through Sanofi's unlisted subsidiary in India would be a negative for Aventis and will constitute the key risk to our recommendation.

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