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Pfizer: Stellar performance! - Views on News from Equitymaster

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Pfizer: Stellar performance!

Jun 28, 2006

Performance summary
MNC pharma major, Pfizer India, announced strong results for the second quarter and half year ended May 2006. While topline for the quarter grew at a healthy double-digit pace, a sharp expansion in operating margins coupled with extraordinary income received contributed to the superlative bottomline growth.

Financial performance: A snapshot
(Rs m) 2QCY05 2QCY06 Change 1HCY05 1HCY06 Change
Net sales 1,350 1,671 23.8% 2,679 3,131 16.9%
Expenditure 1,104 1,302 18.0% 2,205 2,407 9.1%
Operating profit (EBIDTA) 246 368 49.8% 474 724 52.7%
Operating profit margin (%) 18.2% 22.0%   17.7% 23.1%  
Other income 102 109 7.3% 189 230 21.5%
Interest (net) - -   2 0  
Depreciation 37 32 -13.0% 66 63 -4.7%
Profit before tax 311 445 43.4% 595 890 49.6%
Exceptional items (expense) (58) 60   (117) 2  
Tax 98 146 49.8% 189 285 50.7%
Profit after tax 155 359 132.0% 289 607 109.7%
Net profit margin (%) 11.5% 21.5%   10.8% 19.4%  
No. of shares (m) 29.8 29.8     29.8  
Diluted earnings per share (Rs)*         33.5  
P/E ratio (x)*         23.0  
(* 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 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 2QCY06?
Strong revenue growth: For the second quarter, Pfizer recorded a 24% YoY topline growth driven by its pharmaceutical business, which constitutes around 87% of total revenues. The topline growth can be attributed to the strong performance of its key brands such as ‘Corex’, ‘Becosules’, ‘Gelusil’ and ‘Listerine’ mouthwash. It must be noted that in 2QCY05 (especially in March 2005), VAT and excise related concerns affected the company’s performance, which was not the case this quarter. The company launched three new products in 1QCY06 from its global parent’s product stable i.e. ‘Viagra’, ‘Caduet’ (cardiovascular) and ‘Lyrica’ (nerve pain), which could also have contributed to the overall topline growth in the second quarter. It must be noted that ‘Viagra’ managed to capture 2% market share within the first two months of its launch.

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.

Margin expands: Tight control over operating costs coupled with a better product mix contributed to the operating margin expansion (18.2% in 2QCY05 to 22.0% in 2QCY06). Decline in staff 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) 2QCY05 2QCY06 1HCY05 1HCY06
Material consumption 20.2% 22.1% 21.5% 17.9%
Purchase of finished goods 15.0% 15.8% 15.1% 17.6%
Staff cost 16.9% 15.2% 17.1% 16.0%
Other expenditure 29.6% 24.9% 28.7% 25.4%

Bottomline bloats: Bottomline clocked an impressive 132% YoY growth during the quarter backed by a robust performance at the operating level and was further complemented by the receipt of extraordinary income. Extraordinary item for the year include amortisation of compensation paid to employees under VRS (Rs 58.4 m) and profit on sale of its Hyderabad property (Rs 118 m). If one were to exclude this effect then the bottomline has actually grown by 40% YoY.

Quarterly trend
  1QCY05 2QCY05 3QCY05 4QCY05 1QCY06 2QCY06
Net sales growth (YoY change) -2.9% 0.1% 15.0% 16.2% 9.8% 23.8%
Operating profit margin (%) 17.2% 18.2% 22.2% 12.9% 24.3% 22.0%
Net profit growth (YoY change) 30.5% 103.9% 62.2% 23.6% 84.0% 132.0%

What to expect?
At the current price of Rs 770, the stock is trading at a price to earnings multiple of 12.5 times our estimated CY08 earnings. We expect the 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.

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 maintain our positive view on the stock.

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