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MOSL: SANOFI INDIA (Buy)-Earnings dip on lower Respiratory sales and higher opex

SANOFI INDIA: Earnings dip on lower Respiratory sales and higher opex

(SANL IN, Mkt Cap USD2b, CMP INR6022, TP INR6930, 15% Upside, Buy)

 

• Moderate revenue growth and inferior product mix lead PAT decline: Sales grew 9.4% YoY to INR7.5b (our est. INR7.7b) in 2QCY19. Gross margin (GM) shrank 600bp YoY to 54% due to change in the product mix and high inventory. Compared to GM, EBITDA margin contracted at a lower rate of 300bp YoY to 21.1% (our est. 21.7%) due to controlled other operating expense (down 310bp YoY as % of sales). Lower margins led EBITDA to reduce 4.1% YoY to INR1.6b (our est. INR1.7b). PAT declined 2.2% YoY to INR974m (our est. INR1b).
• Anti-diabetic/Cardiac/Neuro outperforms; Respiratory flounders: SANL maintained momentum in the Cardiac (16% of sales)/Anti- Diabetic (30% of sales) segments with secondary sales growth of 10%/14% YoY. Neuro segment (7% of sales) also grew 16% YoY, supporting overall growth of the portfolio. Both Vaccines (12% of sales) and Pain/Analgesics (8% of sales) grew 10% YoY. However, growth was somewhat offset by muted performance in the Respiratory (-6% YoY; 10% of sales) segment. At the portfolio level, growth was evenly spread across volume and prices. In terms of brands, smaller brands (Ranked 11-25) displayed strong performance (+27% YoY), while larger brands, on a higher base (like Lantus and Amaryl M), are growing at a relatively moderate rate YoY.
• Valuation and view: We lower our CY19/CY20 EPS estimates by 6%/4% to factor in the moderate growth in domestic branded formulations. We value Sanofi at 32x 12 month forward earnings with a TP of INR 6930. We remain positive on SANL on the back of (a) broad-based growth in legacy and smaller brands, and (b) evenly spread growth at the portfolio level in terms of volume/price hikes/new launches. Maintain Buy.