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Controlled costs boosts margin

Sanofi India’s (SANL) Q1CY21 performance was supported by controlled costs. Revenue declined 7.6% YoY to Rs7.3bn but sequentially it remained stable. EBITDA margin improved 360bps YoY and 290bps QoQ with lower expenses to 26.1%. Adjusted PAT grew 24.3% to Rs1.5bn. As per AIOCD data, company reported a YoY growth of 2.9% 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 Rs8,570/share.

* Sequential improvement; costs normalising: Revenue declined 7.6% YoY, however adjusting the base for the divestment, wherein company transferred the Ankleshwar manufacturing plant and few products to Zentiva, approximate growth stood at 8.7% YoY. Sequentially revenue remained flattish however, easing of lockdown and growing patient footfalls will provide growth opportunities in the ensuing quarters. Costs continue to remain low with S,G&A expenses dropping 19.2% QoQ while employee expenses remain flattish QoQ. This has boosted EBITDA margin by 290bps QoQ. On a yearly basis, transfer of the Ankleshwar plant has caused a decline in expenses resulting in 360bps jump in EBITDA margin. We expect EBITDA margin to be under pressure in the coming quarters as these expenses will increase with partial reversal of the cost control measures implemented during the previous fiscal due to the pandemic.

* Key products performance: As per AIOCD data SANL has reported a growth of 2.9% during the quarter. Combiflam, Clexane, Avil and Enterogermina have reported YoY growth of 4.6%, 36.4%, 27.3% and 20.9% respectively for the quarter. While Lantus, Allegra, Amaryl M, Cardace, Targocid and Amaryl have declined 4.6%, 19.9%, 12.2%, 4.6%, 2.8% and 8.1% 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 6.7%/ 7.2%/ 11.0% 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 marginally alter estimates for CY21E-CY23E to factor in the current quarter’s performance. Maintain ADD rating with a revised target price of Rs8,570/share based on 33xCY22E EPS (earlier: Rs8,633/share). Key downside risks are: addition of key drugs in NLEM, product concentration, government intervention, and presence of unlisted promoter company.

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