Weak Q3 show, margin pressures to keep Sanofi stock under pressure

Growth led by power brands and new launches could recover as pandemic impact wanes

Sanofi India posted muted December quarter results with revenues missing street estimates. While reported revenues were down 13 per cent over the year ago quarter the base quarter included export sales to Zentiva which has been discontinued from May last year.

In addition to the reduction of Rs 115 crore of exports sales, analysts at Nirmal Bang Research believe the weak turnover was partly attributed to some therapy areas being impacted negatively due to the Covid-19 restrictions. 

Adjusted for the sale of Ankleshwar plant in Gujarat, like-to like sales growth stood at- about 2 per cent. On a sequential basis however there has been a 5 per cent increase in revenues as patient footfalls and lockdown conditions eased. Growth in the quarter was led by its key brands such as Lantus (insulin), Combiflam (pain), Clexane (anticoagulant) and antiallergic Avil. 

 

In addition to weak revenue growth, margins too were weak on a sequential basis. Gross margins were 300 basis points QoQ and flat over the year ago quarter due to higher input prices for Clexane. In addition to this, a surge in sales, general and administration expenses led to a 480 basis points operating profit margin contraction to 23.2 per cent. Margins are expected to stabilise as input costs are slated to come down led by lower Covid-led demand. 

Going ahead, in addition to Lantus, key growth drivers for the company include next generation insulin Toujeo and Combiflam topical pain relief gel/spray among others. Analysts at ICICI Securities highlight that increased chronic contribution which accounts for 63 per cent of domestic sales has supported the company in the recent uncertain environment but now demand for acute therapies is improving with easing of lockdown and that augurs well for growth. Contribution from its top 10 brands continues to be high and stood at 55 per cent of sales in January.

While the stock gained 2.3 per cent led by the announcement of a special dividend, analysts have revised their estimates downwards due to weak revenue performance and lower gross margins. The stock, which has been an underperformer in recent months, trades at 31 times its CY22 earnings estimates and could be looked at on corrections.