Sanofi India (SANL) reported weak Q1CY17 results. Revenue declined 9.1% y-o-y to Rs 5.5b (~8% below est.). EBITDA fell ~21% y-o-y to Rs 1b (24% below est.), with the margin contracting to 18.4% from 23.7% in Q1CY16. PAT of `600m (-25.6% y-o-y) too missed our estimate by ~25% due to lower export volumes and an adverse impact of rupee appreciation v/s euro. Sales declined 9% y-o-y in Q1CY17.
According to AIOCD, secondary sales growth for SANL stood at ~10% y-o-y. We expect the company’s revenue growth to sustain at 12% over CY16-18, in line with industry growth, led by high growth in brands like Lantus, Combiflam, Allegra and Amaryl M, and new product launches. EBITDA margin of ~18.4% was lower than our estimate of 22%, mainly due to high other expenses (+44% y-o-y).
We expect EBITDA margin to normalise at 22-23% over CY16-18E (22.3% in CY16). According to AIOCD, average industry growth was ~10.5% y-o-y in Q1CY17, and regulatory actions (ex-demonetisation) will have a negative one-time impact of ~2% on SANL .
We model growth of 12% in sales, 14% in EBITDA and 16% in earnings over CY16-18E. We maintain our ‘Buy’ rating with a TP of Rs 4,850 @ 28x CY18E (v/s Rs 5,000 @ 28x H1CY18E). We cut CY17E/CY18E EPS by 17/8.6% on the back of impact of price control and demonetization. We believe that recovery in margins, driven by price hikes in key brands will drive its earnings over CY16-18E (at CAGR of 16%). The stock currently trades at 31.9x CY17E and 24x CY18E, at discount to its five year average P/E multiples. We expect Sanofi would sustain its premium multiples owing to: Strong MNC parentage providing access to innovative products. Formidable brands in the domestic market, providing competitive advantage.
High payout ratio (40-50%). Earnings rebound over next two years as we expect 16% EPS CAGR (CY16-18E).vWe value SANL at 28x CY18 earnings to arrive at a revised target price of `4,850 and maintain ‘buy’ rating on the stock. Key risk to our assumptions is a slower-than-expected recovery in margins. We assume EBITDA margins of 23.2% in CY18E.