Weak quarter; sequential improvement
Sanofi India’s (SANL) Q4CY20’s performance remained weak during the quarter. Revenue declined 12.8% YoY to Rs7.2bn but sequentially improved by 4.9%. EBITDA margin improved 160bps YoY with lower expenses but declined by 480bps QoQ to 23.2%. Adjusted PAT grew 7.4% to Rs1.2bn. As per AIOCD data, company reported a YoY growth of 3.8% 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 ADD with a revised target price of Rs8,594/share.
* Sequential improvement; costs normalising: Revenue declined 12.8% YoY, however adjusting the base for the divestment, wherein company transferred the Ankleshwar manufacturing plant and few products to Zentiva, approximate growth stood at 1.6% YoY. Company witnessed 4.9% QoQ improvement with easing of lockdown and growing patient footfalls. Costs are also normalising with raw material costs growing 12.5% QoQ suppressing gross margins by 300bps to 56.1%. While employee expenses have marginally reduced, S,G&A expenses rose by 25.2% QoQ. Overall resulting in EBITDA margin contraction of 480bps QoQ to 23.2%. On a yearly basis, transfer of the Ankleshwar plant has caused a decline in expenses resulting in 160bps jump in EBITDA margin. Company has announced a special dividend of Rs240/share in addition to Rs125/share final dividend for the year.
* Key products performance: As per AIOCD data SANL has reported a growth of 3.8% during the quarter. Lantus, Combiflam, Clexane, Avil and Targocid have reported YoY growth of 10.6%, 11.6%, 54.6%, 32.6% and 20.3% respectively for the quarter. While Allegra, Amaryl M, Cardace, Enterogermina and Amaryl have declined 16.0%, 4.9%, 4.1%, 8.5% and 4.9% YoY respectively. Higher chronic contribution (~63% of domestic sales) has supported the company in the recent uncertain environment but now demand for acute therapies is improving with easing of lockdown and that augurs well for growth.
* Outlook: We expect revenue/EBITDA/PAT to grow 6.5%/ 6.6%/10.4% over CY20- CY23E 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 1-2% and 7- 8% for CY21E-CY22E to factor in lower sales and other income. Maintain ADD rating with a revised target price of Rs8,594/share based on 33xDec’22E EPS (earlier: Rs8,731/share based on 33xJun’22E). Key downside risks are: addition of key drugs in NLEM, product concentration, government intervention, and presence of unlisted promoter company.
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