Aventis’ cash pile is suppressing returns

Aventis’ cash pile is suppressing returns
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First Published: Mon, Apr 12 2010. 09 59 PM IST

Updated: Mon, Apr 12 2010. 09 59 PM IST
The 2009 annual report of Aventis Pharma Ltd (APL) reveals a company with strong brands and a growth strategy in place for 2010. But its large and idle cash
hoard is pulling down its return on capital. APL is the listed Indian subsidiary of Sanofi-Aventis SA. APL’s business in 2009 was partly affected by the loss of income from its Rabipur vaccines business, as the rights to this business went to a joint venture company after a legal dispute.
APL’s sales declined by around 1% to Rs974 crore during 2009, but expenses rose by 3.4% and as a result its net profit fell by 5.4%. APL’s profits would have fallen more but for lower excise duties, chiefly due to the halving of these by the government as part of its fiscal stimulus package. APL’s gross sales (including excise) had actually declined by 3.4%.
Sanofi has focused on India as one of its key emerging markets. That is understandable as the Indian pharmaceutical market grew by 17% during 2009. Aventis has only a 1.6% share of the market. Its growth is also below the market rate, as domestic sales (excluding Rabipur) grew by 12.4%. Its insulin product Lantus grew by around 45% in volume terms. Its top brand Cardace is now a Rs100 crore brand, whose sales rose by 13% during the year. Its Goa facility saw two new product introductions for supply to other Sanofi entities.
Going forward, APL has put plans in place to drive growth. Its strategy for 2010, according to its annual report, will be innovation, expansion and diversification. Apart from tier I markets, it is also entering tier II markets, with what it calls a socio-commercial approach. In 2009, it had strung together programmes to increase awareness and create visibility in its key therapeutic groups. This is also evident in its advertising and sales promotion expenses, which rose by 45% to Rs58 crore.
In 2010, it expects to maintain exports while domestic markets will drive growth. Procurement by Sanofi-Aventis is also expected to pick up during the year. New products and line extensions are planned. Cardace AM is a proposed line extension. APL is also investing in its plants, with its balance sheet showing a capital work in progress of nearly a fifth of its net block of assets.
Though APL’s profit was lower during 2009, cash flows grew due to deft working capital management. Net cash from operating activities rose by 15% to Rs137 crore but this growing cash is also a problem. The company’s return on capital employed slipped to 25.9% against 31.3% in the previous year. While a lower profit during the year was part of the problem, the bigger issue is the cash itself, which makes up nearly 60% of its balance sheet size. APL’s operating performance is expected to improve as its parent hunts for higher growth in emerging markets, but using that cash for an acquisition or returning it to shareholders will help improve its asset utilization ratios.
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First Published: Mon, Apr 12 2010. 09 59 PM IST