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Divestiture, Covid-19 impact sales; margins upbeat…

CY20 revenues de-grew 5.5% YoY to | 2902 crore mainly due to divestiture of few products to Zentiva (Ankaleshwar slump sale) and Covid-19 impact on certain therapies. EBITDA margins improved 291 bps YoY to 24.6% mainly due to lower other expenditure and slightly better gross margins. Subsequently, EBITDA grew 7.2% YoY to | 713 crore. Adjusted PAT grew 9.7% YoY to | 519 crore. Note: Results are not comparable YoY due to closure of the Zentiva transaction on May 29, 2020.

“Power brands” continue to grow ahead of industry

Sanofi’s top five brands (Exhibit 1) together posted revenue CAGR of 10.6% (CY16-20), leading their combined sales contribution to grow from 44% to 49% over CY16-20. Note that four core brands (Lantus, Amaryl, Clexane, Avil) are under price control. We expect future launches from its global staple along with brand extensions and access to innovative molecules from global parent like the recently launched anti-diabetic Toujeo to drive growth.

Divestment of non-core segments to improve product focus

Sanofi closed the Zentiva transaction for a consideration of ~| 300 crore of which ~ | 273 crore has been received with balance to be received by end of CY21. The parent company has also proposed sale of Soframycin, Sofradex brands, sourced through third-party manufacturer and distributed by Sanofi India that contributed just 2.8% of its 9MCY20 sales. Post these divestitures, we expect extended focus on branded formulations’ that typically fetch better margins vis-à-vis third party contracts. We expect EBITDA margins to improve ~125 bps to 25.8% in CY20-22E due to change in product mix, new product launches, volume led growth in top brands and intermittent price hikes in its portfolio. Core RoE (excluding cash) is expected to improve from 45.5% to 56.3% over CY20-CY22E. The board has proposed | 365 per share dividend for CY20 (including | 240 special dividend on account of Ankaleshwar sale)

Valuation & Outlook

Despite Covid-19 and Ankaleshwar divestiture, Sanofi posted a decent CY20 operational performance amid cost rationalisation measures, reduced marketing & promotional spends. Going ahead, we expect marketing spends to be lower than their historical trends on the back of higher adoption of digital marketing tools amid Covid-19. Sanofi remains one of the fastest growing companies in India in anti-diabetic therapy. It launched Toujeo within just three years of its launch in the US, which suggests it is prepared to launch core innovative products in India banking on growth prospects in the anti-diabetic category. A strong growth track in top brands, measured new launches (including innovative launches) besides strong balance sheet and comfort on corporate governance front are some key attributes of MNC pharma companies including Sanofi. We maintain BUY with a target price of | 9820 (unchanged) based on 35x CY22E EPS of | 280.6.

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