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Pfizer: It's the margins this time - Views on News from Equitymaster
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Pfizer: It's the margins this time
Mar 26, 2010

Performance summary
  • Sales grow by 9% YoY during 1QCY10 (November ending fiscal) led by both its pharmaceutical and animal health businesses.
  • Operating margins expand by 2% during the quarter due to a fall in raw material costs and other expenditure (as percentage of sales).
  • The bottomline during 1QCY10 grows by 9% YoY in tandem with growth in sales.


Financial performance: A snapshot
(Rs m) 1QCY09 1QCY10 Change
Net sales 1,902 2,076 9.1%
Expenditure 1,466 1,558 6.3%
Operating profit (EBIDTA) 436 517 18.5%
Operating profit margin (%) 22.9% 24.9%  
Other income 185 155 -16.5%
Depreciation 20 23 13.9%
Profit before tax 602 649 7.9%
Tax 212 225 6.2%
Profit after tax 390 425 8.8%
Net profit margin (%) 20.5% 20.5%  
No. of shares (m) 29.8 29.8  
Diluted earnings per share (Rs)   47.1  
P/E ratio (x)   20.3  

What has driven performance in 1QCY10?
  • During 1QCY10, Pfizer’s topline grew by 9% YoY led by its pharmaceuticals (up 9% YoY) and animal health (up 8% YoY) businesses. Growth in the pharma business could be attributed to the strong performance of its key brands ‘Corex’, ‘Becosules’ and ‘Gelusil’. The clinical operations business also did well to report a growth of 15% YoY during the quarter.

    Segmental performance

    (Rs m) 1QCY09 1QCY10 Change
    Pharmaceuticals (incl. services) 1,583 1,726 9.0%
    PBIT margin (%) 29.2% 30.8%  
    Animal health (incl. services) 277 300 8.2%
    PBIT margin (%) 22.1% 27.6%  
    Services - Clinical      
    Development Operations 40 47 15.3%
    PBIT margin (%) 8.4% 9.0%  
    Total revenues 1,901 2,073 9.1%
    Total PBIT margin (%) 27.7% 29.8%  

  • Pfizer’s operating margins expanded by 2% during 1QCY10 led by a fall in purchase of finished goods and other expenditure (as percentage of sales). Purchase of finished goods fell from 11% of sales in 1QCY09 to 3% of sales in 1QCY10. Raw material costs, however, increased by 2.6% and the same could be attributed to higher Vitamin C prices. Because vitamins fall under price control, the increase in raw material costs could not be passed on in the form of higher prices.

  • Net profits grew by 9% YoY during the quarter. While this was in tandem with growth in sales, it was much lower than the 19% YoY growth in operating profits due to reduction in other income and higher depreciation charges.

What to expect?
At the current price of Rs 956, the stock is trading at a multiple of 15.4 times our estimated CY12 earnings. Pfizer’s operating margins are expected to be under pressure going forward as higher raw material costs continue to play spoilsport. The company has forayed into branded generics in a bid to gain access to a wider market and bolster sales. Two products have already been launched in this category. Pfizer is also looking to increase its reach to doctors and the focus will be more on metros and tier I, II, III and IV cities before it ventures into rural areas. At the current price level, investors would do well to hold on to the stock.

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