MOSL: SANOFI INDIA (Buy)-Strong recovery in margin

​Sanofi India: Strong recovery in margin

(SANL IN, Mkt Cap USD1.5b, CMP INR4199, TP INR5000, 19% Upside, Buy)

• Sanofi's (SANL) 3QCY17 revenue increased ~7% YoY (+11% QoQ) to INR6.7b (~3.4% miss). EBITDA rose 27% YoY to INR1.8b (+21% beat), as margins expanded ~440bp YoY (+830bp QoQ) to 27.5%. Consequently, PAT increased sharply by 44% YoY to INR1.2b (31% beat).
• High-single-digit revenue growth, coupled with strong margin: According to AIOCD, secondary sales growth for SANL stood at ~6% YoY, higher than industry, which saw flattish growth of 1%. The company's key therapeutic areas posted strong growth during the quarter: Anti-Diabetic portfolio grew by 24%, Respiratory by 10.8% and Neuro/CNS by 10.5%. High growth of brands like Lantus, Combiflam, Allegra and Amaryl M, and new product launches should drive SANL's revenue growth, in our view.
• Higher margins attributed to lower raw material cost and other expense: EBITDA margin expanded to 27.5% in 3Q, higher than our estimate of ~22%, mainly on account of lower raw material expense (down ~1,000bp YoY as % of sales) and other expense (down ~620bp YoY). We expect EBITDA margin to normalize at 21-22% over CY16-19E (22.3% in CY16).
• Margin improvement is key: We have modeled 9% sales growth, 10% EBITDA growth and 12% earnings growth over CY16-19E. We maintain our Buy rating with a TP of INR5,000 @ 30x 1HCY19 (v/s INR4,820 @ 30x CY18E).