Aventis Pharma: Input woes

Rising operational costs have put pressure on Aventis Pharma's operating margins.

Aventis Pharma was able to leverage improved domestic demand conditions for its products in cardiovascular, vaccines and oncology segments in CY06, but it also had to grapple with rising operational costs and that put pressure on its margins. As a result, the company's operating profit remained more or less flat on an y-o-y basis at Rs 220.5 crore in the previous year compared with a 9.54 per cent growth in net sales to Rs 884 crore.

Its operating profit margin also fell 230 basis points y-o-y to 25 per cent in CY06. In contrast, other multinational pharma companies such as Pfizer had their operating profit margins rising 290 basis points y-o-y to 24 per cent in the year ended November 2006.

This pressure on Aventis' margins was due to the adjusted raw material costs as a percentage of net sales rising 160 basis points y-o-y to 48.5 per cent in the previous year. In the domestic market, Aventis' sales grew 13.7 per cent y-o-y in CY06. However, in the export market, sales declined 1.3 per cent y-o-y and analysts say it was due to reduced sales in Russia and the other CIS countries.

In the quarter ended December 2006, Aventis' operating profit margin declined a huge 560 basis points y-o-y to 19.6 per cent due to the rising operational cost structure. In contrast, GlaxoSmithkline Pharmaceuticals' operating profit margin grew 610 basis points y-o-y to 29.8 per cent in the December 2006 quarter.

Investors appear to have factored in the margin pressure for Aventis, with the stock under-performing over the past three months "� the stock has declined 11 per cent during the period compared with a 5.3 per cent fall in the Sensex.

Going forward, with domestic demand conditions remaining strong, it should provide the growth momentum to Aventis. Growth rates in the export markets are also expected to pick up. The stock is reasonably valued at 13-14 times estimated CY07 earnings.

Godrej Consumer: New Plans

With a 50:50 JV with the SCA group under its belt, Godrej Consumer will diversify into the feminine hygiene and the baby diapers market. The JV will manufacture the paper-based absorbent products and market them in India, Nepal and Bhutan.

Godrej will have to invest Rs 10 crore in the JV, which will have an initial capital of Rs 20 crore. The SCA group is a good choice for Godrej. The Sweden-based company had revenues of ¤11 billion, of which 21 per cent came from the absorbent products business of feminine hygiene products, baby diapers and incontinence products.

The Rs 800-crore domestic feminine hygiene market is dominated by Procter & Gamble, Johnson & Johnson and Kimberly Clark Lever. Kimberly Clark Lever is a market leader in the Rs 200-crore baby diaper market, with its Huggies brand. The growth rates in the category are at 12 per cent-plus, which are higher compared with those of other FMCG products. However, analysts say the penetration of absorbent products is low at present, which will go up as incomes rise. P&G's feminine hygiene products business has grown at over 20 per cent in the past 18 months. With SCA's product knowledge and Godrej's distribution strength, the prospects appear bright. So, it was no surprise to see the Godrej stock rising 3 per cent to Rs 148 on Monday after the announcement.

In the December 2006 quarter, Godrej's consolidated net sales (including Keyline Brands in the UK and Rapidol in Africa) went up 29.3 per cent to Rs 238 crore, while its operating profit was up 23.5 per cent to Rs 51.5 crore. Operating margins were down 100 basis points to 21.65 per cent.

While advertising spends declined 14.9 per cent, raw material costs went up 400 basis points, which impacted the margin. Its domestic sales grew 16.9 per cent, with a 24.6 per cent growth in soaps and an 8.4 per cent increase in personal care, which was due to a decline in liquid detergents revenues. The Godrej stock lost over 20 per cent in the past six months and trades at an attractive valuation of 18-19 times FY08 earnings.