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Pfizer: On the course

Sep 27, 2004

Performance summary
Pfizer India has declared its 3QFY05 results (November year ending). The net profit of the company has grown by 15 % in the August quarter, although this has to be viewed in the context of a lacklustre performance last year. The operating margins have improved by 110 basis points to 12.7% compared to 11.6% in the same quarter last year. The net profit margin has also improved by 150 basis points to 10.6%. The operating margin for 9mFY05 was also better, with an improvement of 420 basis points to 12.2%.

(Rs m) 3QFY04 3QFY05 Change 9mFY04 9mFY05 Change
Net sales 1,349 1,342 -0.5% 3,432 3,909 13.9%
Other income 90 86 -4.9% 283 268 -5.2%
Expenditure 1,193 1,172 -1.7% 3,159 3,433 8.7%
Operating profit (EBDITA) 156 170 9.0% 273 476 74.3%
Operating profit margin (%) 11.6% 12.7%   8.0% 12.2%  
Interest 1 - -100.0% 4 1 -83.3%
Depreciation 20 23 16.3% 70 66 -5.6%
Profit before tax 226 233 3.2% 482 678 40.4%
Extraordinary items 38 22 -43.1% 113 123 8.2%
Tax 65 70 7.5% 155 197 27.2%
Profit after tax/(loss) 123 142 15.1% 214 358 67.1%
Net profit margin (%) 9.1% 10.6%   6.2% 9.2%  
No. of shares (m)       28.8 28.8  
Diluted earnings per share (Rs)*       9.9 16.6  
P/E ratio (x)         32.3  
(* annualised)            

Whatís the companyís 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 (a cough syrup) and Becosules (a B-complex supplement), both being more than Rs 1 bn brands each. The company has merged Parke Davis and Pharmacia with itself. Pfizer derives most of its revenues from the pharmaceuticals division (86%). The company also has presence in the animal health (10%) and clinical development operations (4%) segments. In the pharma segment, merger with Parke-Davis and strong brands like Benadryl, Corex and Gelusil are the key drivers. In the animal health segment, Pfizer plans to capitalize on its parent's global leader status and become a major player. The company is also evaluating the inorganic growth strategy in this segment. Pfizer also carries out clinical trials on behalf of its parent.

What has driven performance in 3QFY05?
The restructuring exercise initiated by the company in last two years seems to have started benefiting the company, which can be seen from the improved margins over the last two quarters.

Sales:  The sales of the company remained almost stagnant in the August quarter. But this should be viewed in context that there was pent up demand in the same quarter last year after the truckers' strike and VAT fiasco. Looking at segmental performance, the growth of the companyís revenue has been propelled by the pharmaceutical business which recorded a growth of 13% in the first nine months of this fiscal while the clinical development business saw a de-growth of 13%. The animal health division of the company grew by 10% in the same period.

Segment Revenue: 9mFY04 9mFY05 Change Sales in FY04
Sales in FY05
Pharmaceuticals (Incl. Services) 3130 3530 12.8% 85.9% 86.8%
Animal Health (Incl. Services) 390 427 9.6% 10.7% 10.5%
Services - Clinical
Development Operations
125 109 -13.2% 3.4% 2.7%
Total 3645 4066 11.5%    

Restructuring bearing fruit:  Pfizer has benefited on the operational front, led by lower staff cost and other manufacturing expenses. There has been a little improvement in its operating profit on account of fall in other manufacturing expenses and lower proportion of traded goods in the companyís sales. We believe, the operating performance will improve further, as the benefits of restructuring continue to filter in. The streamlining of the operations has also decreased the depreciation charge for the company in the first nine months. In another restructuring exercise, Pfizer has sold its unit at Ankaleshwar, and a profit of Rs 29 m has been booked in the quarter. This has pruned the extraordinary expenses, which arise due to writing-off the VRS related expenses that the company incurred in 2001. The restructuring also involved the discontinuance of relatively non-profitable brands over a period of two years.

Cost Structure 9mFY04 9mFY05 Change % of Sales in FY04 % of Sales in FY05
Consumption of Materials
(Includes Increase/Decrease
in stock in trade)
741 1007 35.9% 21.6% 25.8%
Purchase of Finished Goods 608 543 -10.7% 17.7% 13.9%
Staff Cost 573 615 7.3% 16.7% 15.7%
Other Expenditure 1237 1268 2.5% 36.0% 32.4%
Total 3159 3433 8.7% 92.0% 87.8%

Over the last four quarters
There has been a consistency in Pfizer's performance over the last five quarters. While there was a spurt in sales growth in the first quarter of the of FY05 (low base effect), the overall performance of in last four quarters is commendable considering the fact that the products of the company are mostly old and competition is higher.

What to expect?
At Rs 535, the stock is trading at 32x itís annualised 9mFY05 earnings. Though valuations look on the higher side, one must remember that Pfizer is in a phase where growth in profits will be faster than its sales growth since the full benefits of the restructuring are yet to come. Apart from this, the new patent regime from the January 2005 will bring in benefits for the company in form of new product launches. We believe that the company is set to aggressively explore this market opportunity, which is likely to contribute to a higher growth in the future.

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