Add Sanofi India, target price Rs 7,680: Centrum

Centrum Broking has given an add rating to Sanofi India with a target price of Rs 7,680 based on 33 times CY21E EPS. Sanofi India’s quarterly earnings were below the brokerage’s estimates largely on account of impairment charges of Rs 504 million largely pertaining to Ankleshwar unit. Until the Ankleshwar manufacturing facility is transferred to Zentiva, Sanofi will continue to invest maintenance capital. Adjusting for the exceptional item, the reported PAT would have been closer to Rs 1.3 billion. Sanofi divested its Ankleshwar facility to Zentiva for Rs 2.62 billion. This divestment concluded the export agreement with Zentiva, which was valid till 2023. The company expected an average revenue loss of Rs 4.7 billion per annum due to this contract dismissal.

The management intends to mitigate this revenue loss by focusing on its core activities and brands. Also, the plant produced domestic sales which could transfer to third party manufacturers. The cash balance as on December’19 was Rs 11.3 billion. The one-time special dividend would drive higher return ratios for the company going ahead.

Investment Rationale

Sanofi India continues to own a stronger chronic portfolio in domestic MNC pace. Revenue growth excluding export for the domestic business continues to be at mid-high single digits. In CY20, we are anticipating domestic growth to be in-line with MAT growth and expect this growth to sustain at high single digits. The brokerage awaits the annual report and the second half CY20 numbers once the export sales pertaining to Ankleshwar transaction carve-out. The stock at Rs 7,453 trades at 34 times CY20E EPS of Rs 219.4 and 32 times CY21E EPS of Rs232.6.

Financials

The quarter reported revenue growth of 9.4% year on year. Assuming the export business flat for the quarter (30% of sales), domestic formulation could have posted growth of 13% year on year. Gross margins were at 56.6% declined 44 bps year on year and almost similar quarter on quarter. Staff cost was up 16% year on year while other expenses declined 3% year on year. The EBITDA at Rs 1.77 bn increased 14.9% year on year with EBITDA margins at 22.5% which improved 110 bps year on year.

Promoter/FII Holdings

Promoters held 60.40 per cent stake in the company as of March 31, 2020, while FIIs held 12.17 per cent, DIIs 16.51 per cent and public and others 10.92 per cent.