Sanofi India's Q3CY19 results (Outperformer) - Below estimates

Q3CY19 result highlights

• Revenue for the quarter was Rs7.8b (+5% yoy) vs est of Rs8.1bn.
• Gross margins came soft 56.6% vs 54.4%/58.4% in Q2CY19/Q3CY18. We notice that COGS have increased by ~300bps over last 4 quarters vs 4 preceding quarters since the divestment of Sanofi EU business to Zentiva in Q4CY18. In our view, a potential change of supply terms between Zentiva and Sanofi India might be a driver of this GM compression – there is no official confirmation of the same.
• Reported EBITDA came in lower at Rs1.8b (-6% yoy) below est of Rs1.9b. EBITDAM of 22.5% vs 25.2% booked in Q2CY18 and lower than est of 24.1%. Miss was primarily driven by lower than expected GMs.
• Other income came inline at Rs229m. Tax rate was at 3.5% vs est of 27% mainly due to a reversal of DTL due to a change in tax regime.
• Reported PAT came lower at Rs1.3bn (6% yoy) vs est of Rs1.4bn. This includes Rs394m of exceptional charges related to an impairment charge for its Ankleshwar manufacturing site post its divestment

Key positives: Low tax rate

Key negatives: Lower GM/EBITDAM

Impact on financials: We have increased our CY19/20 earnings by 9/1% to account for lower tax rate and Ankleshwar unit divestment (from Q2CY20)

Valuations & view

A strong marketing presence in India, strategy to aggressively invest in growth, and strong presence in fast growing segments (diabetes and CVS) make Sanofi one of the more promising MNC pharma companies in India. We maintain Outperformer given attractive valuations and steady improvement in operating performance. The stock trades at 20.7x EV/ EBITDA and 31.2x CY20E PER, which are at discount to those of MNC peers like Glaxo. Slowdown in exports and continued regulatory interventions in domestic market remain key risks. Maintain Outperformer with a target price of 7,368 (35x FY21 EPS).