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Curtailed expenses lift margins

Sanofi India’s (SANL) Q1CY22 performance was above our expectations across parameters. While revenue declined 2.5% YoY due to the divestment of nutraceutical business and brands, it grew 2.8% QoQ to Rs7.1bn (I-Sec: Rs6.7bn). EBITDA margin expanded 140bps YoY and 900bps QoQ to 27.5% aided by inventory adjustments (I-Sec: 20.8%). Adjusted PAT grew 4.2% YoY to Rs1.5bn. SANL announced a dividend of Rs490/share post recent sale of assets. In the past few years, the company’s growth and profitability were fuelled by power brands. We remain positive on SANL considering its high exposure in the fast-growing chronic therapy 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 Rs7,955/share (prior: Rs8,107).

* Business review: Revenue grew 2.8% QoQ led by strong growth in key brands. SANL completed the divestment of Soframycin and Sofradex during the quarter for a consideration of Rs1.37bn (including working capital adjustments). Gross margin improved 240bps YoY on account of inventory adjustments. SG&A increased 130bps YoY (-510bps QoQ). Employee expenses decreased 5.1% YoY and 6.7% QoQ on absolute basis. Hence, EBITDA margin improved 140bps YoY. However, adjusting for the sharp changes in inventory, EBITDA margin contracted 920bps YoY and 290bps QoQ. We expect EBITDA margin to be under pressure in the coming quarters due to elevated costs. SANL announced a dividend of Rs490/share. This includes a special dividend of Rs309/share from the consideration received for sale of the nutraceutical division and brand divestment. SANL recently announced the appointment of Rodolfo Hrosz as managing director. His earlier position was as general manager of Sanofi’s consumer healthcare business in Brazil.

* Key products performance: As per IQVIA data, SANL top-10 brands reported 11.9% YoY growth in Q1CY22. Among them, Allegra, Targocid, Clexane, Avil, Combiflam and Hexaxim reported double-digit YoY growth of 37.4%, 31.2%, 27%, 23.8%,15.6% and 11.5% YoY, while Lantus and Amaryl M reported single-digit growth YoY. On the other hand, Enterogermina and Cardace reported decline of 3.9% and 0.8% YoY, respectively. While high chronic contribution (>60% of domestic sales) supported performance in the past few quarters, recovery in acute therapies bodes well for growth.

* Outlook: We expect revenue/EBITDA/PAT CAGRs of 6.6%/7.1%/6.4% over CY21- CY23E with declining contribution from exports. We raise our earnings estimates by 0-2% for CY22E-CY23E to factor-in lower depreciation on account of brand divestment and higher other income. Rising contribution of domestic revenue would help lift margins gradually, in our view.

* Valuations and risks: Maintain ADD with a revised target price of Rs7,955/share based on 28x CY23E EPS (earlier: Rs8,107/share based on 30x Jun’23E). Key downside risks: addition of key drugs in NLEM, product concentration, government intervention, and presence of unlisted promoter company.

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