Sanofi India - Results affected by the divestment - ICICI Securities

Sanofi India's (SANL) Q3CY20 reported a muted performance during the quarter. Revenue declined 11.9% YoY to Rs6.9bn but the base includes business that has been divested alongwith the Ankleshwar plant. Adjusting for it, approximate growth stood at 3.8% YoY. EBITDA margin improved 550bps YoY and 310bps QoQ to 28.0% with lower expenses. Adjusted PAT declined 19.0% to Rs1.3bn. As per AIOCD data, company reported a growth of 4.5% for the quarter. In the past few years, the company's growth and profitability was fuelled by the power brands. We remain positive on SANL considering high visibility of strong growth from its chronic therapy exposure in domestic formulations, strong balance sheet with deep cash reserves, and strong brand equity built over the years. Maintain HOLD with a revised target price of Rs8,731/share.

- Adjusted growth weak; lower costs lift margins: Revenue declined 11.9% YoY, however adjusting the base for the divestment, wherein company transferred the Ankleshwar manufacturing plant and few products to Zentiva, approximate growth stood at 3.8% YoY. It is marginally lower than that of the AIOCD reported growth of 6.3% in the quarter. Transfer of the Ankleshwar plant has caused a sharp decline in expenses. Raw material cost declined 16.9% YoY lifting gross margin 250bps YoY. Staff cost declined 6.3% YoY whereas S,G&A expenses fell sharply by 30.1% YoY. This resulted in 550bps YoY jump in EBITDA margin to 28.0%. On an absolute basis, EBITDA grew 9.5% YoY. However, we expect these expenses to increase and normalise over the next few months alongwith growing domestic revenue.

- Key products performance: As per AIOCD data SANL has reported a growth of 6.3% during the quarter. Lantus, Clexane and Avil have reported YoY growth of 14.1%, 116.8% and 22.8% respectively for the quarter. While Allegra, Amaryl M, Cardace, Enterogermina and Targocid have declined 19.7%, 8.7%, 4.8%, 27.5% and 4.4% YoY respectively. Higher chronic contribution (~54% of domestic sales), which has more inelastic demand as compared to acute therapies, would cushion revenues in the uncertain near-term environment.

- Outlook: We expect revenue/EBITDA/PAT to grow 2.1%/ 6.8%/12.6% over CY19- CY22E with declining export revenue contribution. We expect SANL to improve its return profile and continue generating strong free cash with growing profitability. Rising contribution of domestic revenue would help lift margins gradually.

- Valuations and risks: We reduce our revenue and EPS estimates by 3-4% and 0-3% for CY21E-CY22E to factor in lower sales and expenditure. Maintain HOLD rating with a revised target price of Rs8,731/share based on 33xJun'21E EPS (earlier: Rs8,838). Key downside risks are: addition of key drugs in NLEM, product concentration, government intervention, and presence of unlisted promoter company. Key upside risks are: launch of new products and higher margins with tight cost control measures.

Shares of Sanofi India Ltd was last trading in BSE at Rs.8394.65 as compared to the previous close of Rs. 8315.65. The total number of shares traded during the day was 5580 in over 252 trades.

The stock hit an intraday high of Rs. 8442 and intraday low of 8350. The net turnover during the day was Rs. 46871085.

Source : Equity Bulls

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