Event update: Sanofi India (Outperformer) - Announces divestment of Ankleshwar unit

Event

Sanofi India has announced intent to divest Ankleshwar manufacturing unit

Key highlights

• Sanofi India’s board has approved the slump sale and transfer of its manufacturing facility at Ankleshwar for Rs2,617m to Zentiva Private Limited.
• Ankleshwar unit makes APIs and formulations for distribution / sales globally. As of CY18, net worth of the unit was Rs2,945mn.
• The transaction is expected to be completed by March 2020. Board will consider utilization of proceeds subsequent to receipt of the consideration.
• Zentiva was Sanofi Group’s erstwhile EU generic business which had been sold to Advent International in 2018 as part of a global transaction. As part of this transaction, Sanofi India was to continue to manufacture products for Zentiva for a period of 5 years through 2023. Subsequently, Zentiva has offered to buyout Sanofi India’s Ankleshwar manufacturing unit.
• Sanofi board has approved this transaction as it is considered it to be in line with the company’s broad strategic direction. Management reasoned this decision as an opportunity to address the excess unutilized capacity that would have remained at the end of the supply agreement, to support the focus on manufacturing Sanofi branded products (over manufacturing for third parties) and to improve asset efficiency ratios
• Apart from manufacturing products exported to Zentiva, the unit also manufactures products for Sanofi’s domestic business as well as for ongoing exports to Sanofi group
• As part of the transition, Sanofi will shift manufacturing of domestic market products to its Goa plant and the Zentiva products manufactured in Goa will be shifted to Ankleshwar facility. Mgt doesn’t envisage any disruption during the transition.

Financial impact / View

• Overall, management has guided to an average annual revenue loss of ~Rs4.7bn over the balance 4 years of the 5-year contract. Mgt hasn’t indicated the associated profitability impact of this revenue loss
• Sanofi’s CY18 export sales were ~Rs8.2bn (~30% of consolidated revs) and we estimate this business to grow at ~10% CAGR. Post the divestment, we estimate performa export sales to be ~Rs5bn from CY20 onwards - ~17% of performa consolidated CY20 revenues.
• Assuming ~15% EBITDA margin on the divested business, we estimate ~Rs700m EBITDA impact translating into ~Rs460m PAT impact on an annualized basis from CY20 onwards. This translates into a potential negative ~10% EPS impact given our assumption of Rs4.8bn PAT for CY20. The impact will vary depending on the actual profitability of the divested business.
• The divestment of this Zentiva business should improve the profitability / return ratios of the continuing business of the company
• We will revisit our estimates upon receipt of additional information and closure of the transaction
• The company has indicated that it plans to mitigate the loss in profits in due course through focus on core activities and brands but we see limited drivers for the same in the near term.
• While we await details of valuation report which underpins the transaction, prima facie, this deal seems dilutive for minority shareholders. Notably, the transaction is subject to approval from shareholders.

Valuations & view

While the proposed terms of the divestment of Ankleshwar units are disappointing, the core investment thesis remains broadly intact. We like Sanofi’s strong marketing presence in India, strategy to aggressively invest in growth, and strong presence in fast growing segments (diabetes and CVS). We await further clarity on the financials of the divested business. Maintain Outperformer.