Sanofi India - Q4CY13 Result Update - Strong margin improvement: Centrum

Rating: Buy; Target Price: Rs3,720; CMP: Rs2,632; Upside: 41.3%



Strong margin improvement



We maintain Buy rating on Sanofi India (SIL) and a target price of
Rs3,720 based on 23xDec'15 EPS of Rs161.5. SIL's results for Q4CY13
were in-line with our expectations. The company's revenue growth was
attributed to better export performance during the quarter, which
resulted in improved profitability. EBIDTA margin improved 610bpsYoY
despite NPPP and trade related issues. SIL has benefited from its
major brand Combiflam coming out of price control. Key risks to our
assumptions include slowdown in the domestic pharma market and in the
company's major brands.

$ Good revenue growth: SIL reported 16%YoY growth in revenues to
Rs4.88bn from Rs4.23bn due to better export performance during the
quarter. As per AIOCD AWACS MAT data, SIL's top 10 brands contributed
44% to its revenues. Seven of its top 10 brands grew faster than the
market growth rate of 6.1%. SIL markets Enterogermina of Sanofi
Synthlabo and Pentaxim vaccine of Sanofi Pasteur in the domestic
market. We expect these products to drive future growth of the
company.

$ EBIDTA grows by 610bps: SIL's EBIDTA margin grew by 610bps to 23.3%
from 17.2% due to significantly better export performance and strong
growth of its leading brands. The company's material cost declined by
240bpsYoY to 45.3% from 47.7% due to the change in product mix.
Personnel cost declined by 160bps to 12.8% from 14.4% and other
expenses went down by 210bps to 18.6% from 20.7%. SIL is likely to
benefit from its major brand Combiflam coming out of price control.

$ Net profit up 50%: SIL's net profit before EO items grew by 50%YoY
to Rs673mn from Rs448mn due to margin improvement. The company's other
income declined by 27%YoY to Rs118mn from Rs161mn. Its tax rate was up
marginally to 33.9% from 32.4% of PBT. Net profit after EO items
(Rs254mn from sale of non-trade investments) grew by 107%YoY to
Rs927mn from Rs448mn.

$ Recommendation and key risks: We expect the company to report
superior performance in the future due to its well-known brands, lower
exposure to price control and introduction of new products. We
maintain Buy rating and target price of Rs3,720 for SIL. Our target
price is based on 23x Dec'15 EPS of Rs161.5 with an upside of 41.3%
over CMP. Key risks to our estimates include slowdown of the domestic
pharma market and slower growth of its major brands.



Thanks & Regards

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NPPP Update - Ceiling prices declared - Sanofi India and Merck set to benefit: Centrum

Sanofi India and Merck set to benefit

Our analysis of National Pharmaceutical Pricing Policy (NPPP) shows
Sanofi India and Merck will benefit as their major brands Combiflam
and Evion will be out of price control. Vitamin E API of Merck will
also be out of price control. Ceiling prices declared by NPPA reveals
that leading brands of Abbott India, Cadila Healthcare, Glaxo SK
Pharma, Ranbaxy Labs and Wyeth will be majorly hit. Domestic pharma
companies face risks from NPPP as prices of many major products have
dropped by 20-50%. Also, material cost for pharma companies is set to
move up by 100-200bps due to the rise in API costs.

$ Sanofi India and Merck to benefit:  Sanofi’s major brand Combiflam
(revenues ~Rs1.21bn; 7% of total) has come out of price control and
now the company can increase its price by 10% annually as per NPPP
provisions. The company has also launched a line extension, Combiflam
plus, which is also outside price control. Merck’s major brand Evion
(revenues ~Rs503mn; 6% of total) and its API vitamin E have also come
out of price control.

$ Major brand revenues to suffer: On the basis of ceiling prices
declared by NPPA some major products will face between 6 and 48%
decline in the revenues. Wyeth’s Folvite tablets will face 48% decline
while Sanofi India’s Clexane’s (40mg/0.4ml) revenue is set to decline
by 6%. We expect major brands of Abbott India, Cadila Healthcare,
Glaxo SK Pharma, Ranbaxy Labs and Wyeth to get majorly hit by NPPP.

$ Trade margin set to decline: For drugs outside price control and
classified under price control in NLEM, wholesalers’ margin has come
down to 8% from 10% and the retailer’s to 16% from 20%. Moreover, the
prices of these products have also fallen considerably, affecting
trade. But trade will benefit from price increases of 3-10% by
manufacturers for products outside price control.

$ Benefits & risks: We expect Sanofi India and Merck to benefit as
their major brands Combiflam and Evion are out of price control. Merck
will also benefit from vitamin E API coming out of price control.
Indian pharma companies face considerable risk from NPPP as prices of
some major products have declined by 20-50%, affecting sales and
profitability. The companies are also likely to get hit by the
expected 100-200bps rise in the material cost.



Thanks & Regards,

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Sanofi India Buy Target Price: Rs2,672 : Centrum

Sanofi India

Buy

Target Price: Rs2,672

CMP: Rs2,321

Upside: 15.1%

New launches to drive growth

Sanofi India’s (SIL) results for Q4CY12 were below our expectations. The company reported 19%YoY growth in revenues, 110bps improvement in EBIDTA margin and 24%YoY growth in net profit. Sales growth was driven by the acquired neutraceutical brands of Universal Medicare (UMPL). The company has launched Combiflam Plus during the quarter. SIL is a debt-free company with cash/share of Rs186. We expect the growth momentum to be maintained due to strong growth of its brands and from new launches. We have a Buy rating for the scrip with a revised target price of Rs2672 (based on 24x CY13E EPS of Rs111.3).

m  Good revenue growth: SIL reported 19%YoY growth in revenues from Rs3.56bn to Rs4.23bn due to strong growth of its leading brands and the acquired brands of UMPL. Growth momentum is likely to be maintained due to the launch of new products.

m   Margin improvement by 110bps: SIL’s EBIDTA margin improved by 110bps YoY from 16.1% to 17.2% due to the reduction in material cost and other expenses. The company’s material cost declined by 40bps from 48.1% to 47.7% of revenues due to the change in product mix. SIL’s personnel cost increased by 30bps from 14.1% to 14.4% due to higher sales growth. Other expenses declined by 90bps from 21.6% to 20.7% of revenues. Other expenses were up by 290bps QoQ due to the launch expenses of Combiflam Plus.

m  Top 10 brands contribute 50% revenues:  As per IMS MAT-December’12, SIL’s top 10 brands contributed ~50% to its revenues. Growth rates for major brands were, Lantus 19.1%, Amaryl M 33.6% and Frisium 14.1%.

m  Combiflam Plus Launched: During Q4CY12, SIL launched Combiflam Plus for headache in the domestic market. This OTC product has higher margin and is likely to be the future growth driver for the company.

m  Effect of NPPP:  SIL’s four major brands, Combiflam, Lantus, Avil and Sofrasmycin are currently under DPCO and will continue under price control. Under NPPP, Clexane (Revenues Rs380mn) will come under price control.  SIL’s major brand Combiflam (Revenues Rs1.22bn) is likely to come out of price control. This is likely to benefit the company.

m  Valuations: We expect SIL to benefit from strong growth of its brands and of acquired UMPL products apart from the launch of new products. We have lowered our CY13 and CY14 EPS estimates by 2% and 1% respectively.  At the CMP of Rs2321, the stock trades at 20.8x CY13E EPS of Rs111.3 and 16.6x CY14E EPS of Rs139.5. We have Buy rating for the scrip with a revised target price of Rs2,672 (based on 24x CY13E EPS of Rs111.3) with 15.1% upside over CMP.

Thanks & Regards, 

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