28 July 2011
2QCY11 Results Update | Sector: Pharmaceuticals
Aventis Pharma
BSE SENSEX
S&P CNX
18,210
Bloomberg
Equity Shares (m)
52-Week Range (INR)
1,6,12 Rel. Perf. (%)
M.Cap. (INR b)
M.Cap. (USD b)
5,488
AVEN IN
23.0
2,380/1,697
2/17/10
48.2
1.1
CMP: INR2,094
TP: INR1,838
Neutral
Aventis Pharmaceutical's (AVEN) 2QCY11 performance was below our estimates. Key highlights:
Net sales grew 11.5% to INR3.03b (against our estimate of INR3.06b), EBITDA de-grew 1.6% YoY to INR428m
(against our estimate of INR495m) and adjusted PAT grew 17.2% YoY to INR497m (against our estimate of INR467m).
Top-line growth was led by better performance in domestic formulations business (81% of revenue) which grew 12.1%
YoY to INR2.44b (in line with our estimate). Exports grew 9% to INR588m against our estimate of INR549m.
EBITDA margins declined 190bp to 14.1% (against our estimate of 16.2%) due to higher-than-expected overhead
costs.
Adjusted PAT was INR497m, higher than our estimate of INR467m, despite EBITDA de-growth due to higher other
income (INR361m against our estimate of INR256m).
In the past, the company indicated that for the domestic business, the rural and OTC segment would be key growth
drivers, and that AVEN was likely to incur some extra expenditure to establish itself in these segments. This is likely
to put pressure short-term profitability.
AVEN will be a key beneficiary of the patent regime in the long term. The parent has a strong R&D pipeline with 55
products undergoing clinical trials, of which 13 are in Phase-III or pending approval and some are likely to be launched in
India. However, AVEN's profits declined significantly over the past four years with EBITDA margins declining from 25% in
CY06 to 13.2% in CY10, mainly impacted by discontinuation of Rabipur sales in the domestic market, lower export
growth and higher staff and promotional expenses. RoE declined from 28.6% to 15.5% over CY06-10. After the lower-
than-expected 2QCY11 performance, we have cut our CY11 EPS estimates by 5.8% and CY12 estimates by 2.6%.
Based on our revised estimates, the stock is valued at 28.3x CY11E and 22.8x CY12E EPS. We believe the stock price
performance is likely to be muted in the short-term until clarity emerges on future growth drivers. Maintain
Neutral.
Nimish Desai
(NimishDesai@MotilalOswal.com); Tel: +91 22 3982 5406 /
Amit Shah
(Amit.Shah@MotilalOswal.com) + 91 22 3982 5423

Aventis Pharma
Revenue growth led by the domestic business
AVEN's 2QCY11 net sales grew 11.5% to INR3.03b (against our estimate of INR3.06b),
EBITDA de-grew 1.6% YoY to INR428m (against our estimate of INR495m) and adjusted
PAT grew 17.2% YoY to INR497m (against our estimate of INR467m).
Top-line growth was led by better performance in the domestic formulations business
(81% of revenue) which grew 12.1% YoY to INR2.44b (in line with our estimate). Exports
grew 9% to INR588m against our estimate of INR549m.
Revenue trend
Revenue (Rsm)
Revenue Grow th (%)
20.8
9.8
8.6
9.9
6.6
2,756
3Q
CY10
2,865
4Q
2,763
1Q
CY11
11.5
2,514
1Q
2,715
2Q
3,028
2Q
Source: Company/MOSL
Sales mix (INR m)
2QCY11
Net Domestic Sales
% of Sales
Exports
% of Sales
Net Sales
2,440
81
588
19
3,028
2QCY10
2,177
80
538
20
2,715
YoY (%)
12.1
9.3
11.5
1QCY11
2,221
80
542
20
2,763
QoQ (%)
9.9
8.5
9.6
Source: Company/MOSL
EBITDA and EBITDA margins below estimates
EBITDA declined 1.6% YoY to INR428m, which was below our estimate of INR495m
and EBITDA margins declined 190bp to 14.1% (against our estimate of 16.2%) due to
higher-than-expected overhead costs.
EBITDA and margin trend
EBITDA (Rsm)
16.0
14.5
15.4
EBITDA Margin (%)
15.7
14.1
7.2
364
1Q
435
2Q
CY10
425
3Q
207
4Q
435
1Q
CY11
428
2Q
Source: Company/MOSL
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Aventis Pharma
Adjusted PAT of INR497m was higher than our estimate of INR467m despite EBITDA
de-growth due to higher other income (INR361m against our estimate of INR256m). In
the past, AVEN indicated that for the domestic business, the rural and OTC segment
would be key growth drivers, and that AVEN was likely to incur some extra expenditure
to establish its presence in these segments. This might put pressure on short-term profits.
Domestic formulations: New products hold the key
Over the past few quarters, AVEN's domestic formulations revenue growth has lagged
the average industry growth. Taking a long-term view, we believe AVEN is well placed to
benefit from the introduction of product patents, given its strengths in marketing, a supportive
parent and a healthy product pipeline (of NCEs). AVEN's history of launching patented
products in India, a well mapped portfolio vis-à-vis the parent and ability to build them into
big brands make it a potential beneficiary of the product patent regime in India. AVEN
plans to launch 6-8 products in India in CY11 and to strengthen its portfolio in the diabetes
segment. We believe the patent regime will bring significant benefits to AVEN in the long
term. AVEN is yet to give long-term visibility on the launch of patented products in India.
It does not plan to launch any product from its parent's pipeline in CY11. The parent
(Sanofi-Aventis) is researching and developing 55 projects, with 31 of them being in the
late stage (Phase II and III) development and registration. About 30% of the product
development pipeline comprises vaccines. The table below gives details on the parent's
R&D pipeline:
APL - Parent's NCE Pipeline
Therapeutic area
Metabolic Disorders
Oncology
Cardiovascular
Thrombosis
Central Nervous System
Internal Medicine
Ophthalmology
Vaccines
Total
Phase I
1
6
1
4
7
1
4
24
2
2
3
5
18
4
11
2
2
Phase II
2
3
1
No of projects
Phase III Registration
1
3
2
1
Total
4
12
1
3
7
9
4
15
55
Source: Company/MOSL
Rural initiatives, entry into OTC segment a long term positive but may put
pressure on short-term profits
AVEN is among the few MNCs focusing on rural India. Given increasing disposable
income, government initiatives to improve rural healthcare infrastructure and low
competition, AVEN may benefit from an early entry into this segment. The management
feels it has progressed well with project Prayas and will continue to invest resources on
the project. Prayas is present in 14 Indian states. The project has engaged more than
10,000 doctors and conducted over 2,000 workshops. However, we believe this will not
contribute significantly to revenue in the short to medium term but is a long-term positive.
The rural division generated revenue of INR185m in CY10. In the short term, this initiative
is likely to put pressure on AVEN's profits given the investment required to establish a
presence in this segment and the relatively lower profitability of this market. However, the
management expects the rural division to break even over the next three years. On the
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3

Aventis Pharma
back of the success in project Prayas, AVEN launched other initiatives like 'I am a Champ',
'Saath 7' and 'Together for More'. AVEN's entry into the OTC segment is also likely to
keep margins under pressure as it requires high advertising spend.
Valuation and view
AVEN will be one of the key beneficiaries of the patent regime in the long term. The
parent has a strong R&D pipeline with 55 products undergoing clinical trials, of which 13
are in Phase-III or pending approvals and some are likely to be launched in India. However,
AVEN's profitability declined significantly over the past years with EBITDA margins
declining from 25% in CY06 to 13.2% in CY10, impacted mainly by discontinuation of
Rabipur sales in the domestic market, lower export growth and higher staff and promotional
expenses. RoE declined from 28.6% to 15.5% over CY06-10. After the lower-than-
expected 2QCY11 performance, we have cut our CY11 EPS estimates by 5.8% and
CY12 estimates by 2.6%. Based on our revised estimates, the stock is valued at 28.3x
CY11E and 22.8x CY12E EPS. We believe the stock price performance is likely to remain
muted in the short-term until clarity emerges on future growth drivers. Maintain
Neutral.
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Aventis Pharma
Aventis Pharmaceuticals (APL): an investment profile
Company description
Aventis Pharmaceutical (AVEN) (a 60% subsidiary of
Sanofi Aventis, France) is India's fifth largest MNC and
among the top 15 formulations players. AVEN has built a
strong franchise in chronic therapy areas like anti-diabetes,
oncology and CVS, realigning its domestic portfolio with
that of its parent.
Key investment arguments
APL is well placed to benefit from the introduction of
product patents, given its strengths in marketing, a
supportive parent and a healthy NCE product pipeline
of parent company.
AVEN's history of launching patented products in India,
a well mapped portfolio vis-à-vis the parent and ability
to build them into big brands make it one of the potential
beneficiaries of the product patent regime in India.
AVEN is one of the few companies focusing on rural
India. Given increasing disposable income, government
initiatives to improve rural healthcare infrastructure and
low competition, AVEN may benefit from its early entry
into this segment.
Key investment risks
The biggest risk to AVEN could be the implementation
of the new pharmaceutical policy in its current form.
The policy proposes to significantly increase the span
of control by bringing in 354 additional drugs under price
control. This could severely impact the profitability of
AVEN's business.
Comparative valuations
Aventis
P/E (x)
P/BV (x)
EV/Sales (x)
EV/EBITDA (x)
CY11E
CY12E
CY11E
CY12E
CY11E
CY12E
CY11E
CY12E
28.3
22.8
4.5
4.1
3.4
2.9
25.6
19.2
GSK
30.3
25.7
9.6
8.7
7.5
6.5
22.1
18.5
CY12
CY13
Pre-grant and post-grant patent challenges by domestic
generic companies can hurt plans and prospects of
AVEN's launch of patented products in India.
Recent developments
In March AVEN's holding company acquired 10.3% of
the outstanding equity from UB group companies for
INR4.14b. After the transaction, the stake of the parent
in AVEN has risen to 60.4%.
Valuation and view
AVEN will be a key beneficiary of the patent regime in
the long term. Focus on growing strategic brands and
the parent's strong support augur well for the company.
We believe AVEN is well placed to take advantage of
the patent regime in the long term.
The stock is valued at 28.3x CY11E and 22.8x CY12E
earnings. We maintain
Neutral.
Sector view
The domestic market is expected to grow 12-13%, with
a gradual increase in low penetration levels - companies
with strong brands and marketing muscle will benefit.
The IPR regime is unlikely to lead to major change in
the near term. MNCs and large Indian players will gain
over the long term.
Among MNCs we are bullish on companies whose
domestic portfolio is well aligned with that of its parent
and where risk of conflict with 100% subsidiaries is
limited.
EPS: MOSL forecast v/s consensus (INR)
MOSL
Forecast
74.1
91.9
Consensus
Forecast
92.8
93.7
Variation
(%)
-20.1
-1.9
Target price and recommendation
Current
Price (INR)
2,094
Target
Price (INR)
1,898
Upside
(%)
-12.2
Reco.
Neutral
1-year Sensex rebased
Aventis Pharma
2,400
Sensex - Rebased
Shareholding pattern (%)
Jun-11
Promoter
Domestic Inst
Foreign
Others
28 July 2011
60.4
18.1
9.9
11.6
Mar-11
60.4
18.3
10.0
11.3
Jun-10
60.4
18.7
10.0
10.9
2,200
2,000
1,800
1,600
Jul-10
Oct-10
Jan-11
Apr-11
Jul-11
5

Aventis Pharma
Financials and Valuation
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Aventis Pharma
N O T E S
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Aventis Pharma
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Aventis Pharma
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