Weak Q3, margin pressure to weigh on Sanofi stock
Growth can recover, led by power brands and new launches as Covid pandemic impact wanes
Sanofi India posted muted December quarter results, with revenues missing Street estimates. While reported revenues were down 13 per cent over the year-ago quarter, the base quarter included exports to Zentiva, which was discontinued from May.
In addition to the reduction of ~115 crore in exports, analysts at Nirmal Bang Research believe the weak turnover was partly attributable to some therapy areas being impacted negatively due to Covid-19 restrictions.
Adjusted for the sale of its Ankleshwar plant in Gujarat, sales growth was about 2 per cent. On a sequential basis, however, there has been a 5 per cent increase in revenues as patient footfalls and lockdown eased. Growth in the quarter was led by its key brands such as Lantus (insulin), Combiflam (pain), Clexane (anticoagulant) and antiallergic Avil.
In addition to weak revenue growth, margins too were weak on a sequential basis. Gross margins were 300 basis points lower sequentially and flat over the year-ago quarter due to higher input prices for Clexane. A surge in sales, general and administration expenses led to a 480 bps contraction in operating profit margin to 23.2 per cent. Margins are expected to stabilise as input costs are slated to return led by lower demand.
Key growth drivers for the company include next generation insulin Toujeo and Combiflam topical pain relief gel/spray, among others. Analysts at ICICI Securities highlight that increased contribution of chronics, which accounts for 63 per cent of domestic sales, has supported the company recently but demand for acute therapies is improving with easing of lockdown and that augurs well for growth. Contribution from its top 10 brands continues to be high at 55 per cent of sales in January.
While the stock gained 2.3 per cent, led by the announcement of a special dividend, analysts have revised their estimates downwards due to weak revenue performance and lower gross margins. The stock, which has been an underperformer in recent months, trades at 31 times its CY22 earnings estimates and could be looked at on corrections.