French multinational pharmaceutical company SANOFI logo is seen at the headquarters in Paris
The pressure on Sanofi India’s margin in the March quarter (Q1, as the company follows the January-December accounting year) may have disappointed investors, but the continued robust growth in revenues was inspiring.
Q1’s topline growth of 16 per cent (higher than industry growth of 11 per cent) continues to be led by exports and its anti-diabetic portfolio. Sanofi India, owned 60.4 per cent by Hoechst GmbH, remains a leading player in the anti-diabetic segment with well-known brands such as Lantus, Amaryl, Amaryl M, Amaryl-MV and Toujeo. These coupled with other top brands such as anti-allergic drug Alegra continue to witness good momentum.
Analysts say, Sanofi’s top 16 products contribute 65 per cent to revenues and are likely to drive future growth as well. The products under price control contribute only 18 per cent to revenues and analysts’ data suggest these products have seen an average 4.2 per cent price hike in April 2019. Ranjit Kapadia at Centrum Broking expects further growth momentum with new product launches and up to 10 per cent price increase in products that are outside price control.
Sanofi’s exports business grew by 25 per cent in CY18, aided by higher volumes and currency tailwinds, as the Euro-Rupee rate was up 10 per cent year-on-year, given its major exporting countries are in the European Union. While the management expects exports volume to be maintained in CY19, Elara Capital too estimates volume growth in export business to sustain.
Though overall growth prospects remain robust, there has been some pressure on gross margins. While other expenses and staff costs were down 8-10 per cent year-on-year, the 40 bps year-on-year decline in Ebitda margin to 21.4 per cent in Q1 is attributed to the rise in material costs (to 42.9 per cent of revenue from 40.4 per cent). While net profit still grew 13 per cent year-on-year, analysts have cut their forward estimates due to the pressure on margins. While Motilal Oswal Securities has cut its CY19 and CY20 earnings estimates by 5 and 4.5 per cent respectively to factor in the lower gross margin and higher tax rate, Kapadia has reduced the same by 11-12 per cent adjusting for higher costs and rupee depreciation.
Yet, during CY19-CY20, Sanofi’s earnings are estimated to grow by 20-23 per cent annually. Price-earnings valuations of 23 times CY20 estimates are also attractive. Analysts at Elara Capital say the stock is at a 30-40 per cent discount to multinational peers like GlaxoSmithKline Pharmaceuticals.