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Pfizer: A mixed year! - Views on News from Equitymaster
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Pfizer: A mixed year!
Mar 1, 2006

Performance Summary
MNC pharma major, Pfizer India, announced strong results for the fourth quarter and year ending November 2005. As in the third quarter, the topline has witnessed a healthy growth in the fourth quarter as well after the VAT related issues had crippled performance in the first half. This, coupled with efficiencies at the operating level has led to an expansion in margins and consequently a robust bottomline growth.

Financial performance: A snapshot
(Rs m) 4QFY05 4QFY06 Change FY05 FY06 Change
Net sales 1,445 1,679 16.2% 5,578 5,985 7.3%
Expenditure 1,264 1,462 15.7% 4,919 4,929 0.2%
Operating profit (EBIDTA) 182 217 19.3% 659 1,056 60.2%
Operating profit margin (%) 12.6% 12.9%   11.8% 17.6%  
Other income 125 119 -4.4% 392 410 4.6%
Interest (net) 3 -   8 2 -81.5%
Depreciation 31 40 28.8% 103 139 35.0%
Profit before tax 273 296 8.5% 941 1,326 41.0%
Exceptional items (expense) (39) (34) -12.1% (192) (234) 21.6%
Tax 93 88 -5.6% 293 411 40.2%
Profit after tax 141 174 23.6% 455 681 49.6%
Net profit margin (%) 9.7% 10.3%   8.2% 11.4%  
No. of shares (m) 28.8 29.8   28.8 29.8  
Diluted earnings per share (Rs)*         22.9  
P/E ratio (x)*         43.9  
(* on a trailing 12-month basis)            

What is the company’s business?
Pfizer India is a 40% subsidiary of the world's largest pharmaceuticals company, Pfizer Inc. It has some strong brands in its portfolio like Corex (cough syrup) and Becosules (B-complex supplement), which contribute over 30% to total revenues. The company has merged Parke Davis and Pharmacia with itself. Pfizer derives most of its revenues from the pharmaceuticals division (86%). The company also has presence in the animal health (10%) and clinical development operations (4%) segments. In the animal health segment, Pfizer plans to capitalize on its parent's global leader status and become a major player. Pfizer also carries out clinical trials on behalf of its parent.

What has driven performance in FY06?
Strong revenue growth: For the year, Pfizer posted a 7% YoY revenue growth. It must be noted that while the first half of the year was tough for the company on account of VAT related issues, strong topline performance in 2HFY06 contributed to the growth for the full year. The growth in the topline was led by the company’s pharmaceutical business (86% of revenues), which also clocked a 7% YoY growth during the year owing to the strong performance of its key brands ‘Gelusil’, ‘Corex’ and ‘Becosules’.

As far as other business segments are concerned, the animal healthcare business (10% of revenues) was the laggard this time with a staid 1% YoY growth in revenues. The clinical operations business, despite contributing a relatively marginal 4% to revenues, clocked a healthy 22% YoY growth.

Segmental performance
(Rs m) 4QFY05 4QFY06 Change FY05 FY06 Change
Pharmaceuticals (incl. services) 1,288 1,529 18.8% 5,041 5,412 7.4%
PBIT margin (%) 18.4% 21.9%   21.5% 26.4%  
Animal health (incl. services) 158 152 -3.5% 585 592 1.1%
PBIT margin (%) 1.9% 4.5%   6.1% 7.5%  
Services - Clinical            
Development Operations 94 71 -24.2% 203 248 22.1%
PBIT margin (%) 10.4% 10.4%   10.2% 10.6%  
Total revenues 1,540 1,753 13.8% 5,830 6,252 7.2%
Total PBIT margin (%) 16.3% 19.9%   19.6% 24.0%  

Margins expand: Tight control over operating costs coupled with a better product mix led to sharp spike in operating margins from 11.8% in FY05 to 17.6% in FY06. Sharp decline in the raw material costs and other expenditure (both as percentage of revenues) has aided margin expansion. However, the company’s purchase of finished goods witnessed a considerable rise, thus paring the expansion in margins.

Cost break-up
(% of sales) 4QFY05 4QFY06 FY05 FY06
Material consumption 25.3% 12.0% 26.2% 18.4%
Purchase of finished goods 12.6% 20.1% 13.9% 15.8%
Staff cost 12.7% 17.3% 14.8% 16.7%
Other expenditure 36.8% 37.6% 33.3% 31.4%

Bottomline bloats: Pfizer’s continued focus on efficiencies at the operating level and healthy revenue growth was reflected in the bottomline, which was up 50% YoY during the year. Extraordinary item for the year included amortisation of compensation paid to employees under VRS. If one excludes the extraordinary items in both the years, bottomline grew by 41% YoY.

Over the quarters: After nearly a year of poor revenue growth, Pfizer’s topline in the last couple of quarters has staged a recovery, which is an encouraging sign. Also, operating margins have been on an upward trend (though not on par with its peers Glaxo and Aventis), which is commendable. Having said that, the margin trend was reversed in 4QFY06 due to a sharp increase in the purchase of finished goods.

Quarterly trend
  3QFY05 4QFY05 1QFY06 2QFY06 3QFY06 4QFY06
Net sales growth (YoY change) 0.5% 4.3% -2.9% 0.1% 15.0% 22.5%
Operating profit margin (%) 12.7% 12.2% 17.2% 18.2% 22.2% 12.9%
Net profit growth (YoY change) 15.1% 124.8% 30.5% 103.9% 62.2% 23.6%

What to expect?
At the current price of Rs 1,005, the stock is trading at a price to earnings multiple of 32.6 times our estimated FY08 earnings, which is at the higher end of the valuation spectrum. Operating margins are expected to improve going forward on the back of an improvement in the topline performance, price increases in products (wherever it is possible) and continued efficiency at the operating level. The company has already launched its parent’s blockbuster drug ‘Viagra’ in the Indian markets and is likely to introduce more such products going forward. This is likely to contribute to a higher growth in the future. We shall soon update our research report on the company.

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