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Pfizer: Sluggish performance - Views on News from Equitymaster

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Pfizer: Sluggish performance
May 5, 2014

Pfizer India has announced its 4QFY14 results. The company has reported flat growth in sales and a decline of 3.6% YoY in net profits. Here is our analysis of the results.

Performance summary
  • Net sales remain flat for the quarter. The core pharmaceutical segment grows by 6% YoY for the said period.
  • Operating margins improve by 7.1% helped by decline in operating and employee expenses.
  • Bottomline declines by 3.6% largely due to decline in other income and increase in total taxes.

Financial performance: A snapshot
(Rs m) 4QFY13 4QFY14 Change FY13 FY14 Change
Net sales 2,522 2,517 -0.2% 9,480 10,043 5.9%
Other Operating income 292 228 -22.0% 1,009 1,075 6.6%
Expenditure 2,266 2,016 -11.0% 8,662 8,733 0.8%
Operating profit (EBDITA) 549 729 32.9% 1,827 2,385 30.6%
EBDITA margin (%) 19.5% 26.6%   17.4% 21.5%  
Other income 311 163 -47.6% 1,052 1,094 3.9%
Interest (net) (1) 2    2  4 50.0%
Depreciation 19  20 5.7% 80 80 -0.6%
Profit before tax 841 870 3.4% 2,797 3,396 21.4%
Exceptional income - -   4,141 -  
Tax 260 310 19.3% 1,906 1,187 -37.7%
Profit after tax/(loss) 581 560 -3.6% 5,032 2,209 -56.1%
Net profit margin (%) 23.1% 22.3%   53.1% 22.0%  
No. of shares (m)         29.8  
Diluted earnings per share (Rs)         74.1  
Price to earnings ratio (x)*         16.9  
*based on trailing 12 months earnings

What has driven performance in 4QFY14?
  • Pfizer witnessed flat growth in the topline. However, the company's core pharmaceuticals sales grew by 6% YoY during the quarter. For the full year, the company's net sales were up by 6% and the core pharmaceutical sales were up by 5% YoY during the said period.

  • The operating margins expanded by 710 bps (7.1%) for 4QFY14 and by 410 bps (4.1%) for the full year FY14. As a result, operating profits grew at a healthy pace of 33% YoY and 31% YoY in 4QFY14 and FY14 respectively. Pfizer had taken various steps to rationalize expenses during the year. These steps have helped in decreasing the operating costs.

    Cost break up
    (% of sales) 4QFY13 4QFY14 FY13 FY14
    Cost of production 37.1% 35.2% 35.1% 37.3%
    Staff cost 15.2% 18.6% 22.3% 19.1%
    Other expenditure 34.1% 29.6% 34.0% 30.5%

  • However, despite the strong growth in operating profits, bottomline declined by 3.6% YoY during 4QFY14. This was largely due to decline in other income and higher tax expenses. For full year, the profits were down by 56% YoY. This was due to the extraordinary income of Rs 4.1 bn received from sale of animal business in FY13, which was not present in FY14.
What to expect?
At the current price of Rs 1,265, the stock is trading at a price to earnings multiple of 18.8 times our estimated FY16 earnings. In the upcoming period, that is post Pfizer Wyeth's merger, we expect that sales synergies will help Pfizer witness better topline growth . We estimate the FY16 target price of the merged entity to be Rs 1,627, based on the proposed swap ratio and upside post-merger. We recommend investors to Hold on to the stock of Pfizer at current levels and would update investors as and when we witness any buying opportunity post the merger.

We would like to gently remind you that your allocation to equities should be decided upon after keeping aside some safe cash. Also within your overall exposure to equities please ensure that you broadly follow suggested asset allocation and that no single stock comprises 5% of your portfolio.

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