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Pfizer: Extraordinary boost - Views on News from Equitymaster

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Pfizer: Extraordinary boost
Feb 27, 2008

Performance summary
  • Sales grow by a mere 2% YoY during CY07 due to poor performance of the pharma and clinical services businesses.
  • Operating margins fall by 1% during the year due to rise in raw material costs and other expenditure (both as percentage of sales).

  • Bottomline during CY07 surges by 221% YoY – attributed to the extraordinary income from sale of property at Chandigarh in 2QCY07.

  • Recommends total dividend of Rs 27.5 per share for the fiscal (dividend yield of 4.2%).

(Rs m) 4QCY06 4QCY07 Change CY06 CY07 Change
Net sales 1,709 1,773 3.8% 6,624 6,727 1.6%
Expenditure 1,448 1,586 9.5% 5,234 5,383 2.9%
Operating profit (EBIDTA) 261 188 -28.0% 1,390 1,344 -3.3%
Operating profit margin (%) 15.3% 10.6%   21.0% 20.0%  
Other income 121 223 85.2% 595 690 15.9%
Depreciation 31 15 -50.2% 131 96 -26.7%
Interest 1 0   1 0  
Profit before tax 350 395 13.0% 1,854 1,938 4.5%
Exceptional items (expense) (58) (26) -55.5% (234) 2,563  
Tax 121 149 22.6% 563 1,112 97.6%
Profit after tax 170 221 29.8% 1,057 3,389 220.6%
Net profit margin (%) 10.0% 12.4%   16.0% 50.4%  
Net profit margin (excl. extraordinary items) 13.4% 13.9%   19.5% 12.3%  
No. of shares (m)         29.8  
Diluted earnings per share (Rs)**         37.3  
P/E ratio (x)*         17.5  
(*On a trailing 12-month basis) (**Excluding extraordinary item and tax thereon)

What has driven performance in CY07?
  • During CY07, Pfizer’s topline grew by a staid 2% YoY. This was largely due to the flat growth reported by the company’s pharma business, which in turn could be attributed to the overall subdued performance of the consumer healthcare business. While no details are yet available, the decline in revenues could also be attributed to the lacklustre growth of its key brand ‘Corex’ owing to shortage of codeine phosphate, a raw material, which is sourced from the government.

  • In December 2007, Pfizer India sold four products namely Benadryl, Caladryl, Benylin and Listerine to Johnson & Johnson for Rs 2.1 bn, following the global divestiture of the consumer healthcare business by its parent in June 2006. While the consumer healthcare decision contributed around 20% to Pfizer India’s revenues in CY06, these four products accounted for almost half the turnover of the former (around 10% of total sales). This development will be reflected in the CY08 financials (Pfizer has a November ending fiscal).

    Segmental performance
    (Rs m) 4QCY06 4QCY07 Change CY06 CY07 Change
    Pharmaceuticals (incl. services) 1,571 1,618 3.0% 6,036 6,045 0.2%
    PBIT margin (%) 23.9% 21.4%   28.3% 29.0%  
    Animal health (incl. services) 139 157 13.0% 593 684 15.4%
    PBIT margin (%) -9.3% 2.0%   9.4% 16.0%  
    Services - Clinical            
    Development Operations 56 57 3.1% 257 210 -18.1%
    PBIT margin (%) 3.4% 11.5%   10.2% 12.0%  
    Total revenues 1,765 1,831 3.8% 6,885 6,939 0.8%
    Total PBIT margin (%) 20.6% 19.4%   26.0% 27.2%  

  • Pfizer’s operating margins declined by 1% during CY07, which was largely due to the rise in raw material costs and other expenditure (as percentage of sales). It must be noted that the company imports bulk of its key raw material requirements from China and since the companies there have undertaken price increases, the same has resulted in a rise in raw material costs during the year. While we shall have to tone down our operating margin estimates for CY07 due to the pressure that Pfizer is facing on the raw material front, in the longer term, we expect operating margins to expand backed by improved field force productivity and a better product mix.

  • Pfizer’s bottomline galloped by 221% YoY during the year. This was attributed to the extraordinary income that the company received on the sale of its property at Chandigarh in 2QCY07. As a result, tax expenses also increased during year and included the tax on capital gains to the tune of Rs 460 m. Excluding the impact of the extraordinary item, the bottomline for CY07 has remained flat due to the bleak performance at the topline as well as the operating level.

What to expect?
At the current price of Rs 671, the stock is trading at a multiple of 14.2 times our estimated CY09 earnings. Despite near term pressures, we expect Pfizer’s operating margins to improve going forward on the back of a healthy topline performance backed by existing and new products and continued efficiency at the operating level. The company has already launched three blockbuster drugs from its parent’s product portfolio in the Indian markets and has unveiled plans of launching around three more products going forward as well.

As mentioned earlier, the parent company Pfizer Inc. had announced the global divesture of the Consumer Healthcare Business in June 2006 to Johnson & Johnson. Consequently, Pfizer India divested four brands to Johnson and Johnson in India for a consideration of Rs 2 bn. This will be reflected in the CY08 numbers. Investors should note that we had factored in the sale in the sale of the entire consumer healthcare business in our CY07 estimates and we shall have to revise our numbers accordingly. Overall, we maintain our positive view on the stock.

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