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Pfizer: Slow start to the year

Mar 23, 2007

Performance summary
MNC pharma major, Pfizer India, announced mixed results for the first quarter ended February 2007 (November ending company). For 1QCY07, while topline has grown by 6% YoY, operating margins have declined marginally, led by an increase in raw material costs. Bottomline however, grew faster than the topline due to reduction in depreciation charges and extraordinary expenses. If one were to exclude the impact of the extraordinary item, the bottomline growth has been staid at 1% YoY.

Financial performance: A snapshot
(Rs m) 1QCY06 1QCY07 Change
Net sales 1,460 1,550 6.2%
Expenditure 1,104 1,176 6.5%
Operating profit (EBIDTA) 355 374 5.3%
Operating profit margin (%) 24.3% 24.1%  
Other income 121 120 -0.7%
Interest (net) 0 -  
Depreciation 31 27 -12.9%
Profit before tax 445 467 4.9%
Exceptional items (expense) (58) (26) -55.3%
Tax 139 158 13.8%
Profit after tax 248 283 14.1%
Net profit margin (%) 17.0% 18.2%  
No. of shares (m) 29.8 29.8  
Diluted earnings per share (Rs)*   36.7  
P/E ratio (x)*   20.1  
(* 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, Becosules, Gelusil and Benadryl. Pfizer derives most of its revenues from the pharmaceuticals division (87%). The company also has presence in the animal health (9%) and clinical development operations (4%) segments. In the animal health segment, Pfizer plans to capitalise 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 1QCY07?
Topline picture: Pfizer’s topline for the quarter grew by a relatively slower 6% YoY. The company has attributed this to trade related issues that it faced in Maharashtra, an event that occurred in 4QCY06 as well. The company’s key brands such as ‘Corex’, ‘Becosules’ and the three new products namely ‘Viagra’, ‘Caduet’ (cardiovascular) and ‘Lyrica’ (nerve pain) could have been said to be the key contributors to the topline growth. As we do not have the details of the segmental performance, we will not be able to comment on Pfizer’s other businesses, which include animal health and clinical services. Having said that, this quarter includes the sales of the consumer healthcare business, which has not yet been divested in India.

Maintaining margins: Pfizer’s operating margins declined marginally by 20 basis points, which was largely due to an increase in raw material costs. The company, however, managed to keep its staff costs under control. Going forward, we expect operating margins to improve backed by improved field force productivity and a better product mix.

Cost break-up
(% of sales) 1QCY06 1QCY07
Material consumption 13.1% 20.8%
Purchase of finished goods 19.6% 13.0%
Staff cost 16.9% 14.2%
Other expenditure 26.0% 27.9%

Bottomline outpaces topline: Pfizer’s bottomline grew by 14% YoY during the quarter, largely led by the reduction in depreciation charges. It must be noted that the company has been amortizing VRS expenses to the tune of around Rs 230 m every year for a period of 5 years. There was a reduction of these expenses during the quarter, which also contributed to the growth in the bottomline. If one were to exclude the effect of the extraordinary item, then the bottomline for the quarter has actually grown by a mere 1% YoY. Also, during the quarter the company sold its Chandigarh property for a total consideration of Rs 2.8 bn, the impact of which will be reflected in 2QCY07.

Quarterly trend
  4QCY05 1QCY06 2QCY06 3QCY06 4QCY06 1QCY07
Net sales growth (YoY change) 16.2% 9.8% 23.8% 9.7% 1.8% 6.2%
Operating profit margin (%) 12.9% 24.3% 22.0% 22.8% 15.3% 24.1%
Net profit growth (YoY change) 23.6% 84.0% 132.0% 28.6% -2.1% 14.1%

What to expect?
At the current price of Rs 737, the stock is trading at a price to earnings multiple of 15.5 times our estimated CY09 earnings. We expect 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 is likely to introduce more such products going forward, which will provide a further impetus to the topline growth.

Investors should note that the parent company Pfizer Inc. had announced the global divesture of the Consumer Healthcare Business in June 2006 to Johnson & Johnson. Consequently, the global closure was fixed on December 20, 2006 except for few markets like India, where the process has been delayed. The Board of Directors of Pfizer Ltd. in India is still evaluating the impact of the same on the Indian operations. Having said that, we have factored in the impact of the sale of this business in our estimates for the year. We maintain our positive view on the stock.

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