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Buy Sanofi India Ltd For Target Rs.9,460 - HDFC Securities

Our Take:

Sanofi India (Sanofi), is the Indian subsidiary of France- based pharma multinational Sanofi SA. After the divestment of Ankleshwar facility to Zentiva, the contribution from domestic business would increase from H2CY20 onwards. It derived ~70% of its revenues from India (market share of ~2%) and the balance from exports (largely Europe, Australia and Russia). Sanofi is a chronic focused player with a presence in therapies such as diabetology (insulin and oral), cardiology, pain management, neurology (CNS) and Vaccines. Being a chronicfocused player helps as chronic medicines tend to have a sticky demand, better margins and provide visibility for better growth. Sanofi enjoys premium pricing in its key products vis-à-vis to competitors, due to strong brand equity amongst doctors. Four of its products – Lantus, Amaryl, Allegra and Combiflam feature among India’s top-100 pharma brands. Key products in portfolio include Lantus (Insulin/Diabetes), Amaryl (Tablet/Diabetes drug), Allegra (anti-allergic), Combiflam (pain relief), Cardace (Cardiovascular), Clexane (anticoagulant), Fluquadri and Hexaxim (Vaccines). Anti-diabetic therapy segment accounts for 30% of total sales, and is growing faster than the market while its flagship brand Lantus is the most prescribed basal insulin. The top-10 brands of the company have grown at healthy pace over the past few years. Company derives about 54% of domestic revenues from top-10 brands.

Sanofi has launched Toujeo its insulin product in India within a short time span of its US launch. Going ahead, we expect growth momentum from its top brands to continue. The key growth drivers for the company include its insulin portfolio (led by flagship brand Lantus), Allegra and recently launched Combiflam topical pain relief gel/spray. Furthermore, new launches, brand extensions and access to innovative molecules from its parent would aid topline growth. Post the divesture of the Ankleshwar plant, Sanofi’s focus is shifting towards the lucrative branded formulations business in the domestic markets, which has better margins. In the past few years, the company’s growth and profitability was fuelled by the power brands. We remain positive on Sanofi considering high visibility of strong growth from its chronic therapy exposure in domestic formulations, robust balance sheet with deep cash reserves, and strong brand equity built over the years.

Views and Valuations:

Sanofi is one the leading MNC pharma companies largely focused on the Indian markets. It has leadership position in the anti-diabetic therapy market with brands like Lantus & Toujeo and Amaryl. Company has one of largest OTC brands portfolio along with distinct therapies in rare disease formulations which are also exported to group companies across the world. Higher share of chronic revenues leads to steady revenue growth and strong margins in India. Strong growth in the top 5 brands coupled with expansion in operating margin (due to a favorable mix) points at a sturdy earnings growth.

For CY19, the company had paid a special dividend of Rs 243, taking the total dividend to Rs 349 per share. We estimate 3% revenue CAGR led by 9% growth from the domestic market over CY19-22E. We project 440bps margin expansion led by change in product mix and higher revenue contribution from domestic branded business over the same period. Healthy revenue growth coupled with rise in operating margin would lead to 18.5% PAT CAGR over the same period. High visibility for growth from domestic market, low exposure to highly regulated markets, robust cash rich balance sheet and return ratios, minimal capex, healthy cash position and better cash conversion cycle support our positive view on the stock. At CMP, Sanofi India trades at 27.3x CY22E EPS. We feel investors’ can buy the stock at LTP and add on dips to Rs 7500-7530 (25.0x CY22E EPS) band for base case fair value of Rs 8860 (29.5x CY22E EPS) and bull case fair value of Rs 9460 (31.5x CY22E EPS) over the next two quarters.

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