Sanofi India stock likely to be re-rated on company's improving fundamentals

Sanofi India is a subsidiary of Sanofi, one of the world’s leading pharmaceutical companies. However, unlike other multinational pharmaceutical companies, Sanofi India was not analysts’ favourite for quite some time. Its profitability has declined significantly over the last six years. Its EBITDA margin fell from around 25% in 2006 to around 16% in 2012. Its return on equity (RoE) also contracted from around 29% to 15% during the same period.

In addition to the acquisition of Universal Healthcare in 2011, the discontinuation of Rabipur sales in the domestic market also contributed to the fall in margins and RoE over the years. However, Sanofi India surprised the Street with its 2013 third quarter numbers.

Its revenue, EBITDA and net profit increased by 19%, 24% and 50%, respectively, year-on-year (y-o-y). The EBITDA margin expanded 80 basis points (bps) to 21.1% in the third quarter. While the better-thanexpected export performance contributed to the improvement in margins, the higher PAT growth was the result of strong operational performance.



Sanofi India is expected to report a healthy operational performance in the fourth quarter as well, as its margin profile improves and several of its products exit the Drug Price Control Order (DPCO) of 1995. At present, Sanofi India derives around 30% of its revenue from products that fall under DPCO 1995. The new DPCO doesn’t cover combination drugs and is, therefore, beneficial for pharma companies like Sanofi India.

The company focuses on areas like cardiology, thrombosis, oncology, diabetes and the central nervous system. Sanofi India can boast that its six brands, namely Combiflam, Cardace, Lantus, Clexane, Amaryl and Allegra, are among the top 100 brands in the Indian pharmaceutical market. Since the parent company has a strong R&D pipeline and plans to launch them in India in the coming years, Sanofi India will be one of the key beneficiaries of the upcoming patent regime in the long term.

According to consensus estimates, Sanofi India should report an annualised revenue and net profit growth of 11% and 22%, respectively, between 2012 and 2014. Since it is valued at only 23 times its expected 2014 earnings, it is a good bet for medium- to long-term investors.



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