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Pfizer: Consistency sustained! - Views on News from Equitymaster

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Pfizer: Consistency sustained!

Oct 3, 2006

Performance summary
MNC pharma major, Pfizer India, announced decent results for the third quarter and nine months ended August 2006 (November ending company). Topline, both during the quarter and nine months, has grown at a double-digit pace, primarily led by contribution from its existing and new brands. Operating margins have expanded during both the periods backed by improved efficiencies at the operating level. During the quarter, strong growth in other income and reduction in extraordinary expense has led to the bottomline growth outpacing the operating profit growth.

Financial performance: A snapshot
(Rs m) 3QCY05 3QCY06 Change 9mCY05 9mCY06 Change
Net sales 1,627 1,785 9.7% 4,306 4,915 14.1%
Expenditure 1,267 1,378 8.8% 3,472 3,785 9.0%
Operating profit (EBIDTA) 361 406 12.7% 835 1,130 35.4%
Operating profit margin (%) 22.2% 22.8%   19.4% 23.0%  
Other income 102 126 23.5% 291 356 22.2%
Interest (net) - -   2 0  
Depreciation 32 37 13.0% 99 100 1.1%
Profit before tax 430 496 15.3% 1,025 1,386 35.2%
Exceptional items (expense) (83) (58)   (200) (57)  
Tax 129 157 21.2% 318 441 38.8%
Profit after tax 218 281 28.6% 508 887 74.8%
Net profit margin (%) 13.4% 15.7%   11.8% 18.1%  
No. of shares (m) 29.8 29.8     29.8  
Diluted earnings per share (Rs)*         35.6  
P/E ratio (x)*         25.8  
(* 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 3QCY06?
Stable revenue growth: For the third quarter, Pfizer recorded a decent 10% 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. 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 third quarter. Both ‘Viagra’ and ‘Lyrica’ have contributed 1% each to Pfizer’s 1HCY06 revenues since their respective launches.

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. Having said that, we believe that a 14% YoY overall topline growth in 9mCY06 is commendable.

Margins expand: Tight control over operating costs coupled with a better product mix has contributed to the operating margin expansion (from 22.2% in 3QCY05 to 22.8% in 3QCY06). Decline in staff costs and other expenditure (both as percentage of revenues) also helped matters. However, the company’s purchase of finished goods rose by 590 basis points during the quarter, which could be attributed to the fact that its three new launches (‘Viagra’, ‘Caduet’ and ‘Lyrica’) are being imported and are not manufactured locally. Going forward, we expect operating margins to improve backed by improved field force productivity, better product mix and improved efficiencies at the operating level.

Cost break-up
(% of sales) 3QCY05 3QCY06 9mCY05 9mCY06
Material consumption 20.1% 15.4% 20.9% 17.0%
Purchase of finished goods 12.4% 18.3% 14.1% 17.8%
Staff cost 15.6% 14.1% 16.5% 15.3%
Other expenditure 29.8% 29.5% 29.1% 26.9%

Bottomline bloats: Bottomline, during the quarter, grew by 29% YoY growth backed by a strong performance at the operating level and was further complemented by growth in other income and reduction in extraordinary expense. It must be noted that the company has been amortizing VRS expenses to the tune of around Rs 230 m every year for a period of 5 years. For 9mCY06, bottomline clocked an impressive 75% YoY growth led by a substantial fall in extraordinary expense. While the VRS expenses were amortized during both 9mCY05 and 9mCY06, the impact of the same was lesser during 9mFY06, as Pfizer had received income on sale of its Hyderabad property (Rs 118 m) in 2QCY06. If one were to exclude the effect of extraordinary items then the bottomline for 9mCY06 has actually grown by 34% YoY.

Quarterly trend
  2QCY05 3QCY05 4QCY05 1QCY06 2QCY06 3QCY06
Net sales growth (YoY change) 0.1% 15.0% 16.2% 9.8% 23.8% 9.7%
Operating profit margin (%) 18.2% 22.2% 12.9% 24.3% 22.0% 22.8%
Net profit growth (YoY change) 103.9% 62.2% 23.6% 84.0% 132.0% 28.6%

What to expect?
At the current price of Rs 920, the stock is trading at a price to earnings multiple of 14.9 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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