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Sanofi India: Margin pressure continues - Views on News from Equitymaster
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Sanofi India: Margin pressure continues
Jun 19, 2014

Sanofi India has announced its 1QCY14 results. The company has reported a 15.7% YoY and 16.5% YoY growth in sales and net profits respectively. Here is our analysis of the results.

Performance summary
  • Net sales grow by 15.7% YoY during the quarter due to good growth in its core business.
  • Operating margins decline by 0.4% to 18.2% during the quarter. This restricts growth in operating profits to 12.5% YoY.
  • Bottomline is up by 16.5% YoY, helped by healthy growth in other income.

(Rs m) 1QCY13 1QCY14 Change
Net sales 3,629 4,199 15.7%
Other Operating income 252 250 -0.8%
Expenditure 3,161 3,639 15.1%
Operating profit (EBDITA) 720 810 12.5%
EBDITA margin (%) 18.6% 18.2%  
Other income 163 215 31.9%
Interest (net) 3 2 -36.7%
Depreciation 223 240 7.6%
Profit before tax 657 783 19.2%
Tax 213 266 24.9%
Profit after tax/(loss) 444 517 16.5%
Net profit margin (%) 12.2% 12.3%  
No. of shares (m)   23.0  
Diluted earnings per share (Rs)   118.3  
Price to earnings ratio (x)*   25.1  

What has driven performance in 1QCY14?
  • Sanofi's top line grew by 15.7% YoY during the quarter. The company generates most of its revenues from pharmaceutical segment. The said segment witnessed good growth for the quarter.

  • Operating margins declined by 0.4% to 18.2% during the quarter. This restricted growth in operating profits to 12.5% YoY. This was largely attributable to increase in material costs. One should also note that the company's margins have remained under pressure since some time.

    Cost break up
    (% of sales) 1QCY13 1QCY14
    Cost of production 48.2% 50.8%
    Staff cost 15.6% 14.9%
    Other expenditure 23.4% 21.0%

  • The net profits of the company were up by 16.5% YoY, helped by growth in other income. The net income grew by 32% YoY for the quarter.
What to expect?
At the current price of Rs 2,970, the stock is trading at a price to earnings multiple of 27.6 times our estimated CY15 earnings. The new pricing policy seems to have impacted the company's overall portfolio. This is because MNC pharma companies in general are focused on the domestic market as compared to domestic pharma companies which focus on exports as well. The company has good presence in vaccines, its top six brands viz., Combiflam, Cardace, Lantus, Clexane, Amaryl and Allegra, are among the top 100 brands in the Indian pharmaceutical market. These will drive growth going forward. Also, the launches from the parent company's pipeline will boost growth of the company.

However, there are various challenges like pricing of the drugs, increasing competition from various players, higher dependence on six brands and so on. These are expected to impact the company's performance. These aspects have impacted the growth and also the margins of the company have come under pressure. Overall, current valuations do not offer upside. We shall soon update our CY17 projections on the company. However, our view is that investors not buy stocks at the current price.

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