Sanofi India: Long-term investors advised to consider the stock on dips

Analysts see 19 per cent annual growth in earnings during FY20-22 with significant rise in return ratios post sale of a facility

Multinational pharmaceutical companies, such as Sanofi India, with a domestic focus and strong brand franchise have remained investors’ favourite. Though the lockdown-related disruption, which affected India's pharma market growth, had hurt Street sentiment, Sanofi’s stock was quick to recover. Still, long-term investors could consider it on dips.

Sanofi India’s September quarter (Q3) performance holds testimony and the strong improvement in margins despite a decline in revenues boosts confidence. Sanofi follows the January-December financial year.

Sales at Rs 687 crore declined about 12 per cent year-on-year (YoY), but mainly due to the sale of the export-focused Ankleshwar unit (completed in the June quarter) and a few products to Czech-based Zentiva. Margins, nevertheless, improved significantly, though partially helped by the sale of the unit. While exports generally command a lower margin, the unit’s sale led to lower employee and other expenses.

Nonetheless, the rising contribution of the branded business and chronic portfolio has supported the margin. As the margin expanded 550 basis points (bps) YoY and 310 bps sequentially to 28 per cent, the operating profit grew 10 per cent YoY and 9 per cent sequentially to Rs 192 crore. Despite a higher tax rate and lower other income, net profit still grew by 5 per cent YoY.

After the results, analysts have maintained their positive rating and their target prices indicate upside. With the completion of Zentiva’s transaction, Sanofi will focus on its branded portfolio, which should help boost the margin, say analysts at Elara Capital who broadly maintain their CY21 earnings estimates (despite the Covid-led disruption) and have introduced CY22 EPS estimate of Rs 280. They expect return ratios to see a sharp increase of 700-800 bps during CY19-22 and hence, have revised the target price for the stock to Rs 8,970.

The confidence also stems from further growth in the company's strong brand portfolio propelled by line extensions. Power brands — such as Allegra (an anti-allergic), Combiflam (for pain relief), and Lantus and Amaryl (diabetes control) — remain leaders. The diabetes brand portfolio can grow much bigger with India being an under-penetrated market, feel analysts. 

Further, the company has a presence in chronic-intensive segments like cardiology, dermatology, and neurology. Of these, diabetology and cardiology collectively account for more than half its domestic sales and have been growing in double digits, say analysts.

Domestic focus also means the company is not exposed to volatile markets like the US, which has seen intense pricing pressure.

Analysts at Sharekhan say: “We believe the Q3CY20 performance has some amount of aberration, attributable to low IPM growth, the impact of Covid-related uncertainties, and expect this to normalise.” 

They expect Sanofi’s profits to grow 11 per cent annually during CY19-CY22.