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Pfizer: Starting the year strong! - Views on News from Equitymaster
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Pfizer: Starting the year strong!
Mar 29, 2006

Performance summary
MNC pharma major, Pfizer India, announced strong results for the first quarter ended November 2006. While the topline growth was led by its key brands, a sharp expansion in operating margins contributed to the impressive 84% YoY growth in the bottomline. A rise in the other income also played its part in boosting the bottomline.

Financial performance: A snapshot
(Rs m) 1QCY05 1QCY06 Change
Net sales 1,329 1,460 9.8%
Expenditure 1,101 1,104 0.3%
Operating profit (EBIDTA) 228 355 55.9%
Operating profit margin (%) 17.2% 24.3%  
Other income 87 121 38.0%
Interest (net) 2 0  
Depreciation 29 31 5.8%
Profit before tax 285 445 56.3%
Exceptional items (expense) (58) (58) -0.3%
Tax 92 139 51.7%
Profit after tax 135 248 84.0%
Net profit margin (%) 10.1% 17.0%  
No. of shares (m) 29.8 29.8  
Diluted earnings per share (Rs)*   26.6  
P/E ratio (x)*   43.0  
(* 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, Benadryl, which combined with six other key brands, posted a growth of 16% YoY in CY05. 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 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 1QCY06?
Revenue picture: For the first quarter, Pfizer recorded a 10% YoY topline growth driven by its pharmaceutical business, which constitutes around 87% of total revenues. The topline growth was attributed to the strong performance of its key brands such as ‘Corex’ and ‘Listerine’ mouthwash. It must be noted that in the first quarter i.e. December to February 2005 (it is a November year ending company), VAT and excise related concerns affected the company’s performance, which was not the case this quarter. The company launched three new products from its global parent’s product stable i.e. ‘Viagra’, ‘Caduet’ (cardiovascular) and ‘Lyrica’ (nerve pain). Viagra managed to capture 2% market share within the first two months of its launch. These products are expected to contribute to the topline going forward.

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.

Sharp margin spike: Tight control over operating costs coupled with a better product mix contributed to the operating margin expansion (17.2% in 1QCY05 to 24.3% in 1QCY06). Sharp decline in raw material costs and other expenditure (both as percentage of revenues) also helped matters. However, the company’s purchase of finished goods witnessed a rise, which could partly be attributed to the fact that its three new launches (Viagra, Caduet and Lyrica) are imported and not manufactured locally.

Cost break-up
(% of sales) 1QCY05 1QCY06
Material consumption 22.8% 13.1%
Purchase of finished goods 15.1% 19.6%
Staff cost 17.2% 16.9%
Other expenditure 27.8% 26.0%

Bottomline bloats: Bottomline clocked an impressive 84% YoY growth backed by a robust performance at the operating level and was further complemented by a 38% YoY growth in other income. Extraordinary item for the year include amortisation of compensation paid to employees under VRS (Rs 58.4 m) and profit on sales of its Ankleshwar plant (Rs 0.2 m).

Quarterly trend
  4QCY04 1QCY05 2QCY05 3QCY05 4QCY05 1QCY06
Net sales growth (YoY change) 4.3% -2.9% 0.1% 15.0% 16.2% 9.8%
Operating profit margin (%) 12.2% 17.2% 18.2% 22.2% 12.9% 24.3%
Net profit growth (YoY change) 124.8% 30.5% 103.9% 62.2% 23.6% 84.0%

What to expect?
At the current price of Rs 1,145, the stock is trading at a price to earnings multiple of 37.1 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 a healthy topline performance, price increases in products (wherever it is possible) 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. As far as Viagra is concerned, the company is expecting to capture 10% to 15% market share in the next two years.

Pfizer is also undertaking a business restructuring exercise, wherein the company has created seven strategic business units (SBUs) on the basis of the core therapeutic categories it has been focusing on. This move is in line with its strategy to align its business model with that of its parent, thereby paving the way for possible new product launches in the future. We shall soon update our research report on the company.

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