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Pfizer: Faster rise in profits than sales
Feb 11, 2014

Pfizer India announced third quarter results of financial year 2013-2014 (3QFY14). The company reported a 6.2% YoY growth in sales, while net profits fell by 25.5% YoY. Here is our analysis of the results.

Performance summary
  • Sales grow by a mere 6% YoY during 3QFY14 on account of some impact of the new drug pricing policy and general slowdown in the market.
  • Operating margins improve by 1.4% during the quarter due to a fall in staff costs and other expenditure (as percentage of sales).
  • Net profits fall by 25.5% YoY during the quarter. However, if one excludes the exceptional income in 3QFY13 and the tax thereon, growth in net profits stands at 13% YoY.

Financial performance: A snapshot
(Rs m) 3QFY13 3QFY14 Change 9mFY13 9mFY14 Change
Net sales 2,564 2,722 6.2% 7,674 8,373 9.1%
Expenditure 2,165 2,258 4.3% 6,396 6,717 5.0%
Operating profit (EBIDTA) 399 464 16.4% 1,278 1,656 29.6%
Operating profit margin (%) 15.6% 17.0%   16.7% 19.8%  
Other income 264 281 6.7% 741 931 25.6%
Depreciation 20 17 -12.1% 61 59 -2.6%
Interest costs 0 1   3 2  
Profit before tax 643 727 13.2% 1,955 2,526 29.2%
Exceptional items (expense) 316 -   4,141  -  
Tax 319 251 -21.4% 1,646 878 -46.7%
Profit after tax 639 476 -25.5% 4,450 1,648 -63.0%
Net profit margin (%) 24.9% 17.5%   58.0% 19.7%  
No. of shares (m)       29.8 29.8  
Diluted earnings per share (Rs)         74.5  
P/E ratio (x)         14.3  

What has driven performance in 3QFY14?
  • During 3QFY14, Pfizer's topline grew by a mere 6% YoY on account of some impact of the new drug pricing policy. While the company was hit during the first 2 months of the quarter, sales began to normalize in December. There was a slowdown across all segments of the pharma industry and anti-infectives was the most impacted. Gelusil, Magnex and Dolonex grew by 7% during the quarter, while Becosules saw a fall in sales. The management stated that this fiscal has been a correction year for Becosules and the next year should see the product's sales reaching steady state.

    Cost break-up
    (% of sales) 3QFY13 3QFY14 9mFY13 9mFY14
    Material consumption 18.3% 24.2% 20.7% 24.8%
    Purchase of finished goods 12.0% 11.6% 10.5% 9.4%
    Staff cost 21.5% 16.2% 21.4% 18.3%
    Other expenditure 32.7% 30.9% 30.8% 27.7%

  • Pfizer's operating margins improved by 1.4% during 3QFY14 led by the fall in staff costs and other expenditure (as percentage of sales). This led to the 16% YoY growth in operating profits.

  • Net profits fell by 25.5% YoY during the quarter. However, the company received extraordinary income to the tune of Rs 316 m on the sale of an investment in 3QFY13. Thus, if one excludes this extraordinary income and the tax thereon, then the bottomline grew by 13% in tandem with the growth in PBT.
What to expect?
At the current price of Rs 1,066, the stock is trading at a multiple of 15.8 times our estimated FY16 earnings. Pfizer intends to bring down its focus on the branded generics space as it was not yielding the desired results. Sales of Becosules are expected to normalize next fiscal onwards.

As far as the Pfizer-Wyeth merger is concerned, the same has received approval from SEBI and the stock exchanges. The company is now waiting to hear from the Bombay High Court. The entire process is expected to be completed by September 2014. We estimate the FY16 target price of the merged entity to be Rs 1627, based on the proposed swap ratio and upside post merger. We recommend investors to Hold on to the stock of Pfizer at current levels and would update investors as and when we witness buying opportunity post merger.

We would like to gently remind you that your allocation to equities should be decided upon after keeping aside some safe cash. Also within your overall exposure to equities please ensure that you broadly follow suggested asset allocation and that no single stock comprises 5% of your portfolio.

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