The Hindu Business Line : Aventis Pharma: Buy

FRESH exposure can be considered in the Aventis Pharma stock, which quotes at Rs 1,420. At the current price, the stock trades at a multiple of 20 times its expected per share earnings for the ongoing calendar. Though the stock has not appreciated considerably since our last `buy' recommendation, when the stock was trading at close to Rs 1,300, and has not kept pace with the bullishness seen in the market over the past few months, we maintain that it represents the best stock in the MNC pharma theme. Though our call reflects the confidence in the stock's ability to deliver, we also believe that gains, henceforth, are likely to be more measured in contrast to the almost five-fold rise since 2003.

A look at the numbers

For the quarter-ended June 2005, Aventis' sales rose 16 per cent at Rs 214 crore. Like other firms in the formulations business, Aventis too has benefited from the increase in offtake by trade members after the destocking in the earlier quarter on account of VAT-related issues.

Sales growth for the half-year-ended June 2005, which presents a more appropriate picture of performance as it irons out the wrinkles of the latest quarter, approximates 10 per cent. Aventis runs a lean set-up and this shows up in the margin, which is at close to 30 per cent. This is significantly better than that of its frontline peers such as GlaxoSmithKline and Pfizer.

Aventis' pre-tax profit is up 24 per cent at Rs 64 crore. This has, however, not translated into a corresponding growth in earnings, which, at Rs 34.2 crore, is up by only 2 per cent. Though this appears anaemic, the earnings for the latest quarter have been stifled by a higher incidence of taxation, driven largely by a tax provision for earlier years. In our view, this should be of a one-off nature and not compress earnings in the quarters ahead.

Business drivers

Aventis' performance in the latest quarter was driven by brands in such segments as anti-diabetic (Amaryl), anti-allergic (Avil) and vaccines (Rabipur). The company's close alignment with its parent, Sanofi, has given it access to the latter's product pipeline and new products have been launched in India on the heels of their introduction in developed markets (Lantus — a once-a-day basal insulin — is a case in point). We believe that such support will be more beneficial to Aventis a couple of years down the road when it would be able to launch molecules that enjoy patent protection.

Any pruning of drugs under price control would be another positive for Aventis, as it derives a fair share of its revenue from products that fall under this category.

Valuation

In spite of possessing leading brands in growing therapeutic areas such as cardiology and diabetes and having the highest operational profitability among its frontline peers, Aventis trades at a discount to them (Pfizer trades at 33 times its expected per-share earnings for FY-05; Glaxo quotes at 25 times its expected earnings for the current calendar).

Though there is a possibility of new products being routed through Sanofi's unlisted Indian subsidiary, which would be a key risk, Aventis' inherent marketing strengths, in our view, should make it the preferred vehicle for such launches. Against this backdrop, we believe that there is no scope for an expansion in the stock valuation vis-à-vis its peers.

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