Strong product mix, new launches to keep Sanofi India margins elevated

Street positive given attractive valuations; stock trading at 16x its CY20 estimates

The Sanofi India stock has slipped close to 4.5 per cent over the last three sessions, before recovering on lower-than-expected December quarter results. The weakness in the stock was on account of muted revenue growth and a drop in margins. While revenues grew 8 per cent over the year-ago quarter, margins were down 110 basis points to 18.9 per cent. 

Sales growth was lower than the industry level, which was upwards of 10 per cent due to a high base. With 26 per cent of revenues coming from exports, the firm has benefitted from the 9 per cent depreciation in the rupee, in CY18.

The disappointment was largely on the margin front, given the increase in raw material as well as employee costs. The pressure on margins would have been higher, but for the 180-basis-point dip in other expenses on account of cost-cutting measures. 

Though the results were below estimates, analysts believe that revenues and margins will improve going ahead, led by top brands, new launches, and a better product mix. Analysts also expect the company to post more than 10 per cent growth in revenue over the next couple of years, with net profit growing at double the level of sales.  

Analysts at Nirmal Bang Institutional Equities Research expect profit to outpace revenue growth, as the high-margin portfolio is expected to grow faster than the rest of the business. The key growth drivers include its insulin portfolio (led by flagship brand Lantus), next-generation insulin (Toujeo), Allegra and the recently launched Combiflam topical pain relief gel/spray. 

In addition to volume growth of existing brands, price hikes on drugs that are not under drug control should help boost sales. About two-thirds of Sanofi’s revenues come from its top 18 brands.  

In addition to the strong growth prospects on account of its presence in chronic therapies that constitute half of sales, the Street is bullish on the company, given its attractive valuations. 

At the current price, the stock is trading at 16 times its CY20 estimates. This is at a 30-40 per cent discount to multinational peers such as GlaxoSmithKline Pharma.