Sanofi India - On a growth path - Centrum

Sanofi India's (SIL) results for Q3CY12 were affected by lower other income and higher amortisation cost. The company reported 25%YoY growth in revenues, 290bps improvement in EBIDTA margin and 6%YoY decline in net profit. The sales growth was driven by the acquired neutraceutical brands of Universal Medicare (UMPL). SIL is a debt-free company with cash/share of Rs102. Due to the change in accounting policy, the company's net profit is lower by Rs.78mn due to the amortisation charges. We expect the growth momentum to be maintained due to strong growth of its brands and acquired brands of UMPL. We have a Buy rating for the scrip with a target price of Rs2729 (based on 24x CY13E EPS of Rs113.7).

- Strong growth in revenues: SIL reported 25%YoY growth in revenues from Rs3.33bn to Rs4.16bn due to strong growth of its leading brands. The performance of its leading brands is shown in the table below.

- Good margin improvement: SIL's EBIDTA margin improved by 290bps YoY from 21.1% to 24.0% due to the reduction in material cost and personnel expenses. On a QoQ basis, the margin improvement was 600bps. The company's material cost declined by 230bps from 48.4% to 46.1% of revenues due to the change in product mix. SIL's personnel cost declined by 70bps from 12.5% to 11.8% due to higher sales growth. Other expenses were marginally up by 10bps from 18.0% to 18.1% of revenues.

- Top 10 brands contribute 50% revenues: As per IMS MAT-August'12, SIL's top 10 brands contributed ~50% to its revenues. Amaryl M had the highest growth of 41.4% among these brands.

- Other developments: SIL recently launched an insulin pen at 20% lower price than its competitors. The company will be launching Merial's animal healthcare products (AHC) in India. Merial is a 100% subsidiary of the parent company Sanofi Aventis. SIL has plans to manufacture recombinant human insulin at Shantha Biotechnic's Hyderabad facility as a backward integration initiative at lower cost.

- Effect of NPPP: SIL's four major brands namely Combiflam, Lantus, Avil and Sofrasmycin are currently under DPCO. Under NPPP, two more products Amaryl M and Clexane will come under price control. However, if combinations are excluded from price control under NPPP, two major brands Combiflam and Amaryl M would be outside price control. This is likely to benefit the company.

- Valuations: We expect SIL to benefit from the strong growth of its brands, growth of acquired UMPL products and from the launch of Merial AHC products. At the CMP of Rs2228, the stock trades at 25.2x CY12E EPS of Rs88.3 and 19.6x CY13E EPS of Rs113.7. We have Buy rating for the scrip with a target price of Rs2729 (based on 24x CY13E EPS of Rs113.7) with 22.5% upside over CMP.

Source : Equity Bulls

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