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Divestment of Nutraceuticals complete Rs8,069

Sanofi India’s (SANL) Q3CY21’s performance was below estimates, however, adjusting for the divestment of nutraceutical division, it was broadly in line. Revenue grew 9.9% YoY to Rs7.5bn (I-Sec: Rs8.1bn). EBITDA margin dropped 170bps YoY and 500bps QoQ to 26.3% (I-Sec: 28.5%). Adjusted PAT grew 15.0% to Rs1.5bn. SANL recorded an exceptional income of Rs4.9bn from the sale of nutraceutical division. In the past few years, the company’s growth and profitability were 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.

* Business review: Revenue grew 9.9% YoY but adjusting for the nutraceuticals division growth would have been 12-13% YoY. Company announced the sale of this division in Jul’21 at ~4.6xFY21 sales and has recorded a net gain of ~Rs4.9bn during the quarter. Company expenses appear to be normalising with S,G&A rising 31.8% QoQ to Rs1.2bn. It is also higher by 11.7% YoY wherein the reference quarter was significantly marred by lockdown due to COVID-19. Employee expenses declined 2.0% YoY and 4.1% QoQ on absolute basis and it dropped 180bps YoY (flat QoQ) as a percentage of sales. This suppressed the EBITDA margin by 170bps YoY and 500bps QoQ. We expect EBITDA margin to be under pressure in the coming quarters as these expenses will increase with reversal of the cost control measures that have been implemented.

* Key products performance: As per IQVIA data SANL has reported a YoY growth of 8.8% during the quarter while top 10 brands reported 6.5% YoY growth. Among top 10 brands Targocid, Enterogermina, Avil, Allegra and Combiflam have reported double digit YoY growth of 18.2%, 17.2%,14.6%, 13.5% and 10.5% while Lantus and Amaryl M have reported single digit growth. On an other hand, Clexane and Cardace have reported decline of 6.8% and 4.1% respectively. While high chronic contribution (>60% of domestic sales) has been supporting the performance in the past few quarters, recovery in acute therapies now bodes well for growth.

* Outlook: We expect revenue/ EBITDA/ PAT to grow 6.1%/ 8.0%/ 10.6% over CY20- CY23E with declining export revenue contribution. We raise EPS estimates by 8.8% for CY21E to factor in higher other income but lower CY22-CY23E EPS by 2-6% to factor in impact on Lantus post inclusion in NLEM. We expect SANL to announce a special dividend post the sale of the nutraceutical division. Rising contribution of domestic revenue would help lift margins gradually.

* Valuations and risks: Maintain ADD rating with a revised target price of Rs8,774/share based on 33xCY22E EPS (earlier: Rs8,989/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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