The Hindu Business Line : Aventis Pharma: Buy

The Aventis stock has been a sterling performer over the past three years, and this is likely to be sustained by the strong parentage and focus on critical therapeutic areas.

Fresh exposure can be considered in the Aventis Pharma stock . Any price declines, linked to broad market weakness, can be viewed as an opportunity to step up exposure.

In our view, the stock represents the best play in the MNC pharma space, as the combination of a strong parentage and a focus on critical therapeutic areas are likely to pay off well in the long-term.

Aventis has been a stock on whose prospects we have been consistently bullish over the past threeyears; we do not see any compelling reason to alter our stance. However, given the stock's stellar performance over the past few years, we believe investors should buy into it with tempered return expectations.

Prospects

Financially, for the quarter-ended March 2006, the domestic business has registered good growth on a year-on-year basis. This can be attributed to the rather lacklustre environment that prevailed in the January-March quarter of 2005, when a combination of imposition of excise duty on MRP and the lead-up to the implementation of VAT converged to contain sales for the industry as a whole. While the level of buoyancy seen in this particular quarter may not sustain, we expect growth rates to remain steady.

Aventis' advantage is its presence in key therapy areas such as cardiovasculars, anti-cancer and -diabetes. Strong presence in such chronic therapy areas is that treatment tends to be of a long-term nature, providing a fair degree of stability to the revenue stream.

Aventis has also displayed its willingness to bring in products from its parent's stable even before the implementation of the product-patent regime (Lantus, an anti-diabetes product, is an example). We tend to take a positive view of the support extended by Aventis' parent and believe it will play a key role in launching patent-protected products in two-three years from now.

Risks to our call

The principal risk to our `buy' call would be any attempt to launch key products through the parent's wholly-owned subsidiary, as opposed to the listed entity in India. A similar moveby Wyeth concerning the launch of a key drug resulted in the stock being given a thumbs down (the stock recovered subsequently, though, after the company reversed its decision).

Also, given that Aventis has a fair share of exports (about 25 per cent of sales), any appreciation in the value of the rupee will impede margin expansion.

Valuation

Aventistrades at about 25 times its expected per share earnings for CY-06, which is at a 20-30 per cent discount compared to MNC peers such as Pfizer and GSK. Given Aventis' inherent strengths and a stable business outlook, we believe this valuation gap could narrow. Buy maintained.

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