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Pfizer: Margins on an uptick - Views on News from Equitymaster

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Pfizer: Margins on an uptick

Oct 7, 2009

Performance summary
  • Sales grow by a decent 10% YoY during 3QCY09 (November ending fiscal) led by both its pharmaceutical and animal health businesses.
  • Operating margins improve by 2% during the quarter due to a fall in other expenditure (as percentage of sales).
  • The bottomline during 3QCY09 grows at a lower rate of 8% YoY owing to a 15% YoY fall in other income.

Financial performance: A snapshot
(Rs m) 3QCY08 3QCY09 Change 9mCY08 9mCY09 Change
Net sales 1,907 2,101 10.2% 5,156 5,930 15.0%
Expenditure 1,482 1,590 7.3% 3,913 4,653 18.9%
Operating profit (EBIDTA) 425 511 20.3% 1,243 1,277 2.7%
Operating profit margin (%) 22.3% 24.3%   24.1% 21.5%  
Other income 185 158 -14.8% 506 564 11.4%
Depreciation 20 20 0.5% 67 62 -7.9%
Profit before tax 590 649 10.0% 1,682 1,779 5.8%
Exceptional items (expense) (6) (21)   2,087 (65)  
Tax 203 216 6.9% 1,080 600 -44.4%
Profit after tax 381 412 8.1% 2,689 1,115 -58.6%
Net profit margin (%) 20.0% 19.6%   52.1% 18.8%  
No. of shares (m)       29.8 29.8  
Diluted earnings per share (Rs)         47.5  
P/E ratio (x)*         18.4  
*On a trailing 12-month basis

What has driven performance in 3QCY09?
  • During 3QCY09, Pfizer’s topline grew by a decent 10% YoY. This was led by its pharmaceuticals (up 8% YoY) and animal health (up 18% YoY) businesses. Growth in the pharma business could be attributed to the strong performance of its key brands ‘Corex’, ‘Becosules’ and ‘Gelusil’ all of which recorded double digit growth. For the nine month period, Pfizer’s topline grew by a decent 15% YoY. While the pharma business recorded a 13% YoY growth during 9mCY09, the animal health business grew by a healthy 29% YoY.

    Segmental performance
    (Rs m) 3QCY08 3QCY09 Change 9mCY08 9mCY09 Change
    Pharmaceuticals (incl. services) 1,653 1,784 7.9% 4,393 4,963 13.0%
    PBIT margin (%) 27.8% 28.8%   29.9% 26.2%  
    Animal health (incl. services) 224 264 17.9% 623 804 28.9%
    PBIT margin (%) 17.8% 20.1%   22.3% 21.1%  
    Services - Clinical            
    Development Operations 30 50 69.2% 135 154 14.4%
    PBIT margin (%) 10.8% 71.9%   14.2% 35.9%  
    Total revenues 1,907 2,098 10.0% 5,152 5,921 14.9%
    Total PBIT margin (%) 26.3% 28.7%   28.5% 25.7%  

  • While Pfizer’s operating margins improved by 2% during 3QCY09 led by fall in other expenses, they declined by 2.6% during 9mCY09. The decline during the nine month period was largely due to an increase in raw material and staff costs (as percentage of sales). 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. Staff costs increased during the nine month period due to the addition of people to its field force.

  • While operating profits grew at a faster clip of 20% YoY during 3QCY09 due to an improvement in operating margins, the same growth could not be replicated at the net level. Net profit growth came in at a much lower 8% YoY during the quarter, which was largely due to a fall in other income. For 9mCY09, the net profits plunged 59% YoY. However, this was on account of the extraordinary income that the company received in 9mCY08 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 9mCY08, then the bottomline clocked a growth of 8% YoY as compared to the 3% YoY growth in operating profits.

What to expect?
At the current price of Rs 875, the stock is trading at a multiple of 17.4 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. The company has forayed into branded generics in a bid to gain access to a wider market and bolster sales. Two products have already been launched in this category. 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. While the operating margins have been in line with our estimates, the topline growth has been higher than our estimates. Consequently, we will have to upgrade our numbers for the full year.

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Feb 21, 2019 12:07 PM