Neutral on Aventis Pharma - Motilal Oswal

• Mkt Cap USD1b
• CMP Rs1,989
• Neutral

- Net sales grew 8.6% YoY to Rs2.72b (v/s our estimate of Rs2.79b) while adjusted PAT declined 10% YoY to Rs424m (v/s our estimate of Rs480m).

- Topline growth was led by better performance in domestic formulation business (80.2% of revenues), which grew 15.3% but was tempered by 11.9% de-growth in exports.

- EBITDA declined 17.8% YoY to Rs435m (v/s our estimate of Rs483m) while EBITDA margin contracted 515bp YoY to 16% partially due to high base. EBITDA margin was lower than our estimate of 17.3% mainly due to adverse product mix, which is likely to have been impacted by the company's initiatives in rural areas and higher other expenditure due to its foray into the OTC segment, which requires spend on advertising.

- Adjusted PAT declined 10% YoY to Rs424m and was lower than our estimate of Rs480m primarily due to lower than expected topline and EBITDA.

Valuation and view: We believe APL will be a key beneficiary of the patent regime. The parent has a strong R&D pipeline, with a total of 49 products undergoing clinical trials, of which 17 are in phase-III or pending approvals. Some of these may be launched in India. Focus on growing strategic brands and strong support from the parent augurs well for the company. However, APL's profitability has declined significantly in last three years, with EBITDA margin declining from 25% for CY06 to 15.2% for CY09. Based on the lower than expected 2QCY10 performance, we have downgraded our EPS estimates by 9% for CY10 to Rs69.2 (up 1.2% YoY) and by 7.3% for CY11 to Rs82.3 (up 19% YoY). The stock currently trades at 28.8x CY10E and 24.2x CY11E EPS. We believe stock price performance is likely to remain muted in the short-term until clarity emerges on growth drivers for exports. We maintain Neutral.

Source : Equity Bulls

Keywords