Aventis Pharma Ltd’s 2010 annual report shows the side effects of the company’s efforts to increase its market presence. Units of multinationals in India are playing a key role in meeting the parent’s ambitions of growing faster in emerging markets.

The strategy usually involves launching new products, expanding market coverage, spending more on marketing and hiring more people to drive this effort.

Aventis Pharma’s sales rose by 11% to 1,089 crore in 2010. But its cash generated from operations, a key parameter of a company’s financial health, fell by 8% due to higher working capital requirements. Its sales growth itself may seem relatively low, considering the domestic market grew by 16.5%, but the annual report shows that exports caused the slowdown. Sales accounts for 80% of the total sales in the domestic market and rose by 18% in 2010.

Domestic market growth is being driven chiefly by volume growth and product mix, and not by price, which appears to be the case for Aventis Pharma, too. Its top five brands reported good sales growth, with Combiflam’s sales rising by 10%, Cardace by 10%, Lantus by 30%, Amaryl by 29% and Allegra by 17%.

Aventis Pharma launched a new division called Onsite to focus on treatment of diabetes and hypertension in semi-metros and towns with a large affected population. Another key initiative is to enter rural markets with a separate business model and by providing affordable medicines. This division’s turnover tripled over 2009, said the annual report, but its contribution to overall sales would be relatively low.

Exports fell by 6.5% in value terms despite sales in volume terms rising by 4%. Currency appreciation was the chief reason for the decline in exports. While exports lowered sales growth, Aventis Pharma’s profitability was affected by higher operating costs.

Material costs rose in line with sales growth. But wage costs rose by about 13% and other expenses rose by about 20%, much higher than sales growth. Expenses linked to growing its business such as advertising and promotion, selling and distribution, and travel have risen sharply. In addition, toll manufacturing costs, too, have risen because of higher volumes of outsourced production.

Coming back to its cash flow statement, it shows the company’s operating profit at almost the same level as last year. But a sharp increase in debtors, advances and inventories was not offset by a higher increase in creditors. Since the company is setting up new divisions and entering new markets, it will need to invest in inventory and distribution.

The working capital increase does not appear to be a major concern at present. Investors would be watching to see if the sales growthtrends higher, and if its working capital situation returns to more normal levels in 2011. An unrelated concern is a loan of 130 crore to group firm Shantha Biotechnics Ltd. Investors would want to know why this loan was given, its tenure and whether the interest rate is market determined.

The company expects a good year ahead, both for exports and in domestic markets, barring any unfavourable developments on the price control front. It will launch some product extensions, a few more products for tier II markets and expand capacity in Goa. The annual report also says wage negotiations are in process, which may signal wage inflation in 2011 as well.