MOSL: Sanofi India (Buy) - In-line results - outlook positive

Sanofi India: In-line results; outlook positive

(sanl IN, Mkt Cap USD1.7b, CMP INR4876, TP INR5600, 15% Upside, Buy)

• Double-digit revenue growth coupled with margin improvement: 1QCY18 revenue rose ~12% YoY to INR6.2b (~3.4% miss). Revenue growth adjusted for GST was higher at 16% YoY, partly due to a low base of last year. Gross margin improved ~300bp YoY to 57%, led by a better product mix. EBITDA grew robustly by ~32% YoY to INR1.3b (~3% miss), with the margin expanding ~340bp YoY to 21.8%. This, along with higher other income (by ~42% YoY), led to a significant increase in PAT by ~38% YoY to INR825m (4.4% miss).
• Good traction in existing products; new launches to also drive strong growth: According to the AIOCD, secondary sales growth for SANL stood at 11.2% YoY for the quarter ended March 2018, higher than market growth of 8.7%. The company’s key therapeutic areas grew strongly in the quarter: Anti-Diabetic portfolio grew by 10% YoY, Vaccines by 24% YoY and Respiratory by 18.4% YoY. High growth of brands like Lantus, Combiflam, Allegra and Amaryl M, as well as new product launches are expected to drive SANL’s revenue growth, in our view. The company recently launched a new product Toujeo (Insulin Glargin) in the diabetes portfolio, which has received positive response. Toujeo is approved to treat patients who are 18 years and older, while Lantus (Sanofi’s another Insulin Glargin) is suitable for ages six and up. Thus, there is low scope of cannibalization.
• Better product mix and improved productivity drive margins: EBITDA margin expanded to 21.8% (marginally above estimate of ~21.6%), primarily due to low raw material costs (down ~260bp YoY as % of sales), other expense (down ~110bp YoY) and employee expense (down ~70bp YoY). We expect the EBITDA margin to normalize at 21-23% over CY17-19.