Sanofi India: Strong balance sheet, high cash reserves positives for stock

Products in the price control list and growth of the non-power brand portfolio will be key monitorables

Aided by inventory gains, Sanofi India’s March quarter results (Q1CY22) were better than estimates on the operational front. The Indian arm of the global healthcare innovator reported a 139 basis point expansion in operating profit margins (900 basis points sequentially) to 27.5 per cent. Net sales were down 2.5 per cent year on year (YoY) while they were up 2.8 per cent quarter on quarter (QoQ).

The results are not comparable as the company sold off its nutraceutical segment in July last year to Universal Nutriscience for Rs 587 crore. It also sold a slew of brands including antibacterial cream Soframycin to Entube Ethicals later in November for Rs 125 crore. 

The company announced a dividend of Rs 490 a share which includes a special dividend of Rs 309 per share. The special dividend is paid from the money received on sale of neutraceutical segment and brands.

Brokerages have a mixed view on the margin trajectory. Analysts at ICICI Securities expect operating profit margins (which contracted 290 basis points sequentially adjusted for changes in inventory) to be under pressure in the coming quarters on elevated costs. However, Sharekhan Research believes that the divestment of the slow-moving business – nutraceuticals and Soframycin and Sofradex, recently could enable it to achieve a linear cost structure, and aid margin expansion. 

Adjusted for divested business, growth in the March quarter is expected to be in single digits. Growth for its top five brands over the trailing twelve months was at 11 per cent. These brands are Lantus (insulin), Allegra (allergy), pain killer Combiflam, anti-diabetic Amaryl M and anti-coagulant Clexane. Established brands which accounted for half of its sales in CY21 are expected to grow at a faster clip post the divestments. 

Analysts say that the company’s emphasis on three areas - accelerating growth in the diabetology space, fortifying presence in established/top brands, focusing on building brands in consumer products, could drive the growth ahead. Portfolio expansion in cardiology and strong growth in insulin products could add to overall growth, says Sharekhan Research. A key overhang for the company is addition of products to the price control regime. Currently, 18 per cent of Sanofi’s portfolio is under price control. 

In addition to its predominant exposure to high-growth chronic therapies, a strong balance sheet, high cash reserves and robust dividends are positives for the stock. At the current price, the stock, which has shed 11 per cent since its highs in mid April, is trading at 23 times its CY23 earnings estimates. While this is lower than the three year average valuations, ICICI Direct has downgraded the stock from buy to hold as it awaits visible growth triggers and ramp up in growth of its brand portfolio excluding the power brands.