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Another quarter of controlled costs

Sanofi India’s (SANL) Q2CY21’s performance was yet again supported by controlled costs. Revenue grew 11.1% YoY to Rs7.9bn but it was below our estimate of Rs8.2bn. EBITDA margin improved 640bps YoY and 520bps QoQ with lower expenses to 31.3%. Adjusted PAT grew 31.6% to Rs1.8bn. As per AIOCD data, company reported a YoY growth of 30.8% 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 Rs8,989/share.

* Business recovering; costs still under control: Revenue grew 11.1% YoY and 8.8% QoQ. Sequential revenue growth despite rising cases suggests inherent growth in the business which has been supported by QoQ improvement across all the top brands for the company. However, company remains cautious towards expenditure with S,G&A expenses dropping 16.2% QoQ to Rs881mn. It is also lower by 5.4% YoY wherein the reference quarter was significantly marred by lockdown due to COVID-19. Employee expenses declined 9.5% YoY but grew a modest 5.4% QoQ on absolute basis but it dropped 320bps YoY and 50bps QoQ as a percentage of sales. This has boosted EBITDA margin by 640bps YoY and 520bps 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 AIOCD data SANL has reported a growth of 30.8% during the quarter. While Clexane, Enterogermina and Targocid have more than doubled YoY, Amaryl and Amaryl M have reported mid to high single digit growth. Lantus, Allegra, Combiflam, and Avil have reported strong YoY growth of 19.8%, 15.0%, 27.3% and 36.6% respectively for the quarter. Cardace was the only drug among the top brands to report a decline of 1.9% YoY but it also grew 2.6% QoQ. While high chronic contribution (~63% of domestic sales) has been supporting the company’s performance in the past few quarters, recovery in acute therapies now bodes well for growth.

* Outlook: We expect revenue/ EBITDA/ PAT to grow 6.7%/ 9.2%/ 12.7% 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 raise EPS estimates by 3-5% for CY21E-CY23E to factor in the reduced costs. Maintain ADD rating with a revised target price of Rs8,989/share based on 33xCY22E EPS (earlier: Rs8,570/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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