We attended Aventis Pharma – APL’s recent annual general meeting (AGM). The management indicated that its focus will be on the domestic formulations business, with rural and OTC segments as the key growth drivers. APL is likely to incur some extra expenditure for establishing its presence in these segments. In CY09, APL launched 15 new products in tier-II cities. Exports are likely to remain flat in CY10.
Domestic formulations – new product introductions hold the key: In the last few years, APL’s domestic formulations revenue growth has lagged the average industry growth of 11%. Taking a longer-term view, we believe that APL 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). However, the company is yet to provide visibility on the launch of patented products in India.
APL is one of the few companies focusing on rural India. Given the increasing disposable income, various government initiatives to improve rural healthcare infrastructure, and low competition, APL may benefit from its early entry into this segment. However, this is likely to pressurize profitability, given the front-ended investments required to establish a presence in this segment and the relatively lower margins.
We believe APL will be one of the key beneficiaries of the patent regime in the long-term. 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 are likely to be launched in India. However, APL’s profitability has declined significantly in the last three years, with EBITDA margins declining from 25% for CY06 to 15.2% for CY09, mainly impacted by lower top-line growth and higher staff & promotional expenses.
RoE has declined from 28.6% to 17.1% in the same period. We expect the company to post EPS of Rs75.9 for CY10 (up 11%) and Rs88.8 for CY11 (up 17%), leading to 14% EPS CAGR for CY09-11. The stock is currently valued at 23.7x CY10E and 20.3x CY11E EPS. We believe the stock price performance is likely to remain muted in the short-term until clarity emerges on growth drivers for exports. We downgrade the stock to Neutral with a target price of Rs1,780 (20x CY11E EPS).
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