Sanofi India - Margin under pressure - Centrum

Sanofi India's (SIL) results for Q1CY13 were below our expectations. The company reported 13%YoY growth in revenues, 170bps decline in EBIDTA margin and 11%YoY growth in net profit. The sales growth was driven by its major brands Lantus and Amaryl M. The company launched Combiflam Plus during Feb'13 in the OTC segment. The expenses relating the launch were included in the quarterly results. SIL is a debt-free company with cash/share of Rs186. We expect the growth momentum to be maintained due to strong growth of its brands and from the new product launches. We have a Buy rating for the scrip and have revised the target price from Rs2,672 to Rs2,964 (based on 24x June'14 EPS of Rs123.6).

- Moderate revenue growth: SIL reported 13%YoY growth in revenues from Rs3.43bn to Rs3.88bn due to the good growth of its leading brands Lantus and Amaryl M. The sales growth was in line with the industry growth of ~11% during the quarter. We expect the growth momentum to be maintained due to the launch of new products.

- Margin declines by 170bps: SIL's EBIDTA margin declined by 170bps YoY from 20.3% to 18.6% due to the increase in other expenses. The company's material cost declined by 120bps from 46.2% to 45.0% of revenues due to the change in product mix. SIL's personnel cost increased by 20bps from 14.3% to 14.5% due to the addition of manpower. Other expenses increased by 270bps from 19.2% to 21.9% of revenues due to the expenses incurred on the launch of Combiflam Plus in the OTC segment.

- Top 10 brands contribute 49% revenues: As per IMS MAT-February'13, SIL's top 10 brands contributed 49% to its revenues. The growth rates for major brands were as follows: Lantus 18.5%, Amaryl M 30.5% and Frisium 12.1%.

- Launch of Combiflam Plus: During February'13, SIL launched Combiflam Plus for headache in the OTC segment. This product has a higher margin and is likely to be the future growth driver for the company.

- Effect of NPPP: SIL's four major brands, Combiflam, Lantus, Avil and Soframycin are currently under DPCO and will continue under price control. Under NPPP, Clexane (Revenues Rs382mn) would come under price control. SIL's major brand Combiflam (Revenues Rs1.25bn) is likely to come out of price control. We expect positive impact on SIL from NPPP.

- Valuations: We expect SIL to benefit from the strong growth of its brands, acquired Universal Medicare products and from the launch of new products. We have lowered our CY13 EPS estimates by 4% and enhanced our CY14 EPS estimate by 1%. At the CMP of Rs2,551, the stock trades at 24.0x CY13E EPS of Rs106.7 and 18.2x CY14E EPS of Rs140.4. We have a Buy rating for the scrip with a revised target price of Rs2,964 (based on 24x June'14 EPS of Rs123.6) with 16.0% upside over CMP.

Source : Equity Bulls

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