Sanofi India: Sturdy balance sheet, cash-generation augur well for company

High growth visibility in chronics, strong balance sheet will help sustain premium valuation

Sanofi India posted a 20 per cent growth in profit before tax (PBT), before exceptional items, for the June quarter (Q2) of calendar year 2020 (CY20), despite the lockdown leading to lower revenue.

While some therapy areas were impacted in Q2, Sanofi completed the slump sale of its Ankleshwar manufacturing facility and some of its products. Consequently, sales fell 5 per cent year-on-year (YoY).

The power brands and chronic portfolio, however, supported earnings. Analysts say the portfolio is skewed towards the high-growing chronic segment and, along with its leadership in basal insulin (for diabetes), Sanofi has an edge in the current environment.

The brand portfolio includes diabetes management (Lantus, Amaryl M, Toujeo), cardiology products (Cardace), pain relief (Combiflam), and anti-allergic (Allegra and Avil), among others, and all are driving growth. 

For instance, in June, Lanctus, Cardace, Combiflam, and Avil reported double-digit growth of about 30 per cent YoY, against the tepid 2.4 per cent growth of the industry.

 

 

Thus, Sanofi’s operating profit grew by 12.3 per cent and margins expanded 580 basis points to 29.2 per cent, leading to higher PBT, despite a fall in sales. This, along with lower taxes, led to 40 per cent YoY jump in net profit.

Analysts expect the momentum to continue. Strong growth in the top five brands, coupled with operating profit margin expansion, points to sturdy earnings growth, say analysts 

at Sharekhan.

Sanofi has a robust portfolio to cater to India’s under-penetrated diabetes market. Growth in the domestic cardiology market, too, is healthy, at 8 per cent YoY in Q2, despite the pharma market’s soft growth.

Analysts say, with a focus on the domestic market, Sanofi is better placed than its peers, which are facing pricing pressure. Sanofi’s products, which came under price control a few years back, have seen good increase in volumes, while their yearly price hikes are in line with the wholesale price index. Thus, these products, too, are growing well.

Analysts at Elara Capital maintain their CY20 and CY21 earnings estimates and expect return ratios to surge by 600 basis points over CY19-21. This should support the premium valuations of the stock, which is up 1.6 per cent since the results were announced. At Rs 7,694, it is trading at 29x CY21 earnings and analysts at Sharekhan see a further upside of 20 per cent over the next 12 months. With uncertainty across the globe due to the pandemic, Sanofi, with sturdy balance sheet and strong cash generation, will be least impacted, say analysts.