For Sanofi, better days loom ahead

Price controls and note ban hit 2016 performance; sales volume growth to drive earnings

The year 2016 was challenging for Sanofi India, the drug maker known for its brands such as Combiflam, vaccines and diabetes portfolio. While the drug price control impacted the company’s performance in the early part of CY2016 (follows January-December accounting year), note ban weighed on its December quarter numbers. These have led to its stock price remaining under pressure. But, as the impact fades out, analysts expect the company to report a strong rebound in revenue, profitability and thereby stock price. That’s why they are now bullish on Sanofi. After the company reported its December quarter and financial year performance on Monday, analysts have strong buy recommendation on the stock. 

The expectations stem from the fact that despite pressure due to price control, volume growth in key brands is expected to be strong and will drive overall revenue. Also, launch of new product line extensions and exports of insulin pens will mean further gains. 

Analysts such as Ranjit Kapadia at Centrum Broking say they expect improved performance due to continued strong growth of Sanofi’s six flagship brands, which grew faster than the market. Sanofi is amongst his top picks in the pharmaceutical sector. 

Param Desai at Elara Capital also says that at the current market price, the stock is trading at an attractive valuation of 13x CY18 enterprise value to Ebitda and 24x CY18 estimated earnings, which is at a discount to other multinational peers. So, despite cutting his EPS estimates of Sanofi by 11 per cent each for CY17 and CY18, Desai arrives at a revised target price of Rs 5,225. Kapadia’s target price of Rs 5,330 indicates an upside of 23 per cent for the stock trading at Rs 4,255. 

The company’s performance during December quarter was weak, led by note ban. The high base of December’15 quarter, and later drug price control, also added to stress, as operating profit declined about five per cent year-on-year. Thus, operating profit margin declined 180 basis points to 18.1 per cent. The higher taxes and depreciation further impacted profits. Thus, net profit was down 40 per cent year-on-year. 

The positive is, volume growth trend in key brands remains good. The company’s top 18 brands contributed about 66 per cent to revenues and six of the top brands surpassed the market growth rate of 7.2 per cent in December 2016. Though company’s 25 per cent of portfolio may be under price control, volume growth continues to lend support. Thus, sales during the quarter still have grown four per cent year-on-year. Analysts say multinationals such as Sanofi have demonstrated significant resilience, as pickup in volume growth post price reduction has partially, or in some cases, to a large extent, offset the price cuts in a short period of time.