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Pfizer: Input pressure persists - Views on News from Equitymaster

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Pfizer: Input pressure persists
Jul 3, 2009

Performance summary
  • Sales grow by a decent 14% YoY during 2QCY09 (November ending fiscal) led by both its pharmaceutical and animal health businesses.
  • Operating margins contract by 8.1% during the quarter due to a substantial increase in purchase of traded goods (as percentage of sales).
  • The bottomline during 2QCY09 declines by 18% YoY, on the back of 23% YoY fall in operating profits.


Financial performance: A snapshot
(Rs m) 2QCY08 2QCY09 Change 1HCY08 1HCY09 Change
Net sales 1,692 1,927 13.9% 3,249 3,829 17.8%
Expenditure 1,265 1,597 26.2% 2,431 3,063 26.0%
Operating profit (EBIDTA) 427 330 -22.8% 818 766 -6.4%
Operating profit margin (%) 25.2% 17.1%   25.2% 20.0%  
Other income 194 221 14.1% 321 406 26.5%
Depreciation 24 21 -12.7% 47 41 -11.5%
Profit before tax 596 529 -11.2% 1,093 1,131 3.5%
Exceptional items (expense) (6) (44)   2,093 (44)  
Tax 210 172 -18.2% 878 384 -56.3%
Profit after tax 379 313 -17.5% 2,308 703 -69.5%
Net profit margin (%) 22.4% 16.2%   71.0% 18.4%  
No. of shares (m)       29.8 29.8  
Diluted earnings per share (Rs)         46.4  
P/E ratio (x)*         17.0  
(*On a trailing 12-month basis)

What has driven performance in 2QCY09?
  • During 2QCY09, Pfizer’s topline grew by a decent 14% YoY. This was led by its pharmaceuticals (up 11% YoY) and animal health (up 32% YoY) businesses. Growth in the pharma business could be attributed to the strong performance of its key brands ‘Corex’, ‘Dolonex’ and ‘Minipress’ all of which would have recorded a double digit growth. For the half year period, Pfizer’s topline grew by a robust 18% YoY. While the pharma business recorded a 16% YoY growth during 1HCY09, the animal health business grew by a healthy 35% YoY.

    Segmental performance
    (Rs m) 2QCY08 2QCY09 Change 1HCY08 1HCY09 Change
    Pharmaceuticals (incl. services) 1,436 1,596 11.1% 2,740 3,179 16.0%
    PBIT margin (%) 32.9% 20.3%   31.1% 24.7%  
    Animal health (incl. services) 199 263 32.2% 399 539 35.2%
    PBIT margin (%) 28.5% 21.0%   24.9% 21.6%  
    Services - Clinical            
    Development Operations 54 64 18.0% 106 105 -0.9%
    PBIT margin (%) 1.3% 25.3%   15.2% 18.8%  
    Total revenues 1,689 1,923 13.8% 3,245 3,823 17.8%
    Total PBIT margin (%) 31.3% 20.6%   29.8% 24.1%  

  • Pfizer’s operating margins plunged by 8.1% during 2QCY09, which was largely due to the rise in purchase of traded goods (as percentage of sales), from 7.7% in 2QCY08 to 13.8% in 2QCY09. Further, there was an increase in raw material and staff costs as well. The rise in raw material costs was due to the increase in Vitamin C prices. Further, because vitamins fall under price control, the increase in raw material costs could not be passed on in the form of higher prices, thereby exerting pressure on margins. Pfizer has been facing this problem since the last few quarters, wherein the company had opined that it did not expect this scenario to ease in the coming quarters. Since operating margins also took a hit in the first quarter, for 1HCY09 they fell by 5.2%.

  • The 23% YoY fall in operating profits during the quarter led to the 18% YoY drop in the bottomline. For 1HCY09, the net profits plunged 70% YoY. However, this was on account of the extraordinary income that the company received in 1HCY08 on account of the sale of four consumer health brands to Johnson & Johnson. Thus, if one excludes this extraordinary income and the tax thereon during 1HCY08, then the bottomline clocked a growth of 1% YoY as compared to the 6% YoY drop in operating profits.

What to expect?
At the current price of Rs 790, the stock is trading at a multiple of 15.7 times our estimated CY11 earnings. Pfizer’s operating margins are expected to be under pressure going forward as higher raw material costs continue to play spoilsport. As far as new product launches are concerned, the company has some lined up for the second half of CY09 although none of them will be patented in India. 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.

With the intention of increasing its stake from the current 41% to 75% in Pfizer India, the parent company Pfizer Inc. had made an initial open offer of Rs 675 per share to Pfizer India’s shareholders. Since, this did not have many takers, the parent has now revised its open offer price up to Rs 830 per share. However, since there are no intentions of de-listing Pfizer India, we are of the opinion that investors should hold on to the stock based on the future growth prospects of the company especially since it has been committed in launching new products in India.

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