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Pfizer: Not much to cheer about - Views on News from Equitymaster
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Pfizer: Not much to cheer about
Sep 25, 2007

Performance summary
  • Sales decline by 2% YoY during 3QCY07 due to poor performance of the pharma business.

  • Operating margins improve by 170 basis points (1.7%) due to reduction in purchase of finished goods and other expenditure (both as percentage of sales).

  • Bottomline records a relatively decent 10% YoY growth during 3QCY07 largely led by the rise in other income and lower depreciation charges.

  • Bottomline during 9mCY07 surges by 256% YoY - attributed to the extraordinary income from sale of property at Chandigarh in 2QCY07.

Financial performance: A snapshot
(Rs m) 3QCY06 3QCY07 Change 9mCY06 9mCY07 Change
Net sales 1,785 1,757 -1.6% 4,916 4,954 0.8%
Expenditure 1,378 1,327 -3.7% 3,784 3,798 0.4%
Operating profit (EBIDTA) 406 430 5.8% 1,131 1,156 2.2%
Operating profit margin (%) 22.8% 24.5%   23.0% 23.3%  
Other income 126 173 37.8% 356 467 31.3%
Depreciation 37 23 -36.1% 100 80 -19.3%
Profit before tax 496 580 17.0% 1,388 1,543 11.2%
Exceptional items (expense) (58) (96) 63.5% (56) 2,590  
Tax 157 176 12.4% 442 963 118.1%
Profit after tax 281 308 9.8% 890 3,169 256.2%
Net profit margin (%) 15.7% 17.6%   18.1% 64.0%  
No. of shares (m) 29.8 29.8   29.8 29.8  
Diluted earnings per share (Rs)**         35.6  
P/E ratio (x)*         18.7  
(* on a trailing 12-month basis) (** excluding extraordinary item)

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 and Benadryl. Pfizer derives most of its revenues from the pharmaceuticals division (87%). The company also has presence in the animal health (10%) and clinical development operations (3%) 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 3QCY07?
Topline woes: During 3QCY07, Pfizer’s topline declined by 2% YoY. This was largely due to the 4% YoY fall in revenues from the pharma segment, which in turn could be attributed to the overall staid performance of the consumer healthcare business. While no details are yet available, the decline in revenues could also be attributed to the flat growth of its key brand ‘Corex’ due to shortage of codeine phosphate, a raw material, which is sourced from the government. The company had faced this problem in 2QCY07 as well, and had indicated that the pressure would continue in 3QCY07, which has been the case. Having said that, the management expects the situation to improve going forward.

For 9mCY07, the topline performance was a tad better having grown by 1% YoY. Investors should note that the consumer healthcare business, which accounts for 22% of the total revenues, has not yet been divested in India and the company expects the decision on the same to be finalised this year itself. Since we have factored in the sale of the consumer healthcare business in our numbers, we have estimated a 5% YoY decline in revenues for CY07.

Segmental performance
(Rs m) 3QCY06 3QCY07 Change 9mCY06 9mCY07 Change
Pharmaceuticals (incl. services) 1,635 1,577 -3.5% 4,465 4,428 -0.8%
PBIT margin (%) 29.2% 32.5%   29.8% 31.8%  
Animal health (incl. services) 152 179 18.0% 454 528 16.2%
PBIT margin (%) 18.0% 23.9%   15.2% 20.1%  
Services - Clinical            
Development Operations 70 43 -38.1% 201 153 -24.0%
PBIT margin (%) 12.0% 12.7%   12.1% 12.2%  
Total revenues 1,856 1,799 -3.1% 5,120 5,108 -0.2%
Total PBIT margin (%) 27.6% 31.2%   27.8% 30.0%  

Operating margin scenario: Pfizer’s operating margins improved by 1.7% during the quarter, which was largely due to the fall in purchase of finished goods and other expenditure (as percentage of sales). However, it must be noted that the company imports bulk of its key raw material requirements from China and since the Chinese companies have undertaken price increases, the same has resulted in a rise in raw material costs during the quarter. While we shall have to tone down our operating margin estimates for CY07 due to the pressure that Pfizer is facing on the raw material front, in the longer term, we expect operating margins to expand backed by improved field force productivity and a better product mix.

Cost break-up
(% of sales) 3QCY06 3QCY07 9mCY06 9mCY07
Material consumption 14.4% 18.4% 16.1% 20.0%
Purchase of finished goods 18.3% 14.3% 17.8% 14.9%
Staff cost 14.1% 15.1% 15.3% 14.5%
Other expenditure 30.5% 27.8% 27.8% 27.3%

Bottomline outpaces topline: Pfizer’s bottomline grew by a relatively decent 10% YoY during the third quarter, largely due to the rise in other income and lower depreciation charges. For the nine-month period, however, the bottomline galloped by 256% YoY. This was attributed to the extraordinary income that the company received on the sale of its property at Chandigarh in 2QCY07. As a result, tax expenses also increased during the nine month period and included the tax on capital gains to the tune of Rs 460 m. Excluding the impact of the extraordinary item, the bottomline for 3QCY07 and 9mCY07 has grown by 19% YoY and 10% YoY respectively.

Quarterly trend
  2QCY06 3QCY06 4QCY06 1QCY07 2QCY07 3QCY07
Net sales growth (YoY change) 23.8% 9.7% 1.8% 6.2% -1.4% 0.8%
Operating profit margin (%) 22.0% 22.8% 15.3% 24.1% 21.4% 23.3%
Net profit growth (YoY change) 132.0% 28.6% -2.1% 14.1% 618.2% 256.2%

What to expect?
At the current price of Rs 667, the stock is trading at a multiple of 14.1 times our estimated CY09 earnings. Despite near term pressures, we expect Pfizer’s 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 has unveiled plans of launching around three more products going forward as well. As mentioned earlier, the parent company Pfizer Inc. had announced the global divesture of the Consumer Healthcare Business in June 2006 to Johnson & Johnson. Consequently, the global closure was fixed on December 20, 2006 except for few markets like India, where the process has been delayed. The Board of Directors of Pfizer Ltd. in India is still evaluating the impact of the same on the Indian operations and an outcome on the same is expected in CY07 itself. Having said that, we have factored in the impact of the sale of this business in our estimates for the year. We maintain our positive view on the stock.

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