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Pfizer: Staff costs impact margins
Oct 8, 2010

Pfizer India has announced its 3QCY10 results. The company has reported 12.7% YoY and 3% YoY growth in sales and net profits respectively. Here is our analysis of the results.

Performance summary
  • Sales grow by 13% YoY during 3QCY10 (November ending fiscal) led by its pharmaceutical business.
  • Operating margins fall by 2.2% during the quarter due to a rise in staff costs and other expenditure (as percentage of sales).
  • The bottomline during 3QCY10 grows by 3% YoY in tandem with growth in operating profits.


Financial performance: A snapshot
(Rs m) 3QCY09 3QCY10 Change 9mCY09 9mCY10 Change
Net sales 2,101 2,367 12.7% 5,930 6,677 12.6%
Expenditure 1,590 1,844 16.0% 4,653 5,274 13.4%
Operating profit (EBIDTA) 511 523 2.3% 1,277 1,403 9.8%
Operating profit margin (%) 24.3% 22.1%   21.5% 21.0%  
Other income 158 159 1.0% 564 529 -6.2%
Depreciation 20 25 23.3% 62 70 13.6%
Profit before tax 649 657 1.4% 1,779 1,861 4.6%
Tax 216 218 0.7% 600 638 6.3%
Exceptional items (21) (15)   (65) (27)  
Profit after tax 412 425 3.2% 1,115 1,196 7.3%
Net profit margin (%) 19.6% 17.9%   18.8% 17.9%  
No. of shares (m)       29.8 29.8  
Diluted earnings per share (Rs)         48.7  
P/E ratio (x)         23.0  

What has driven performance in 3QCY10?
  • During 3QCY10, Pfizer’s topline grew by 13% YoY led by its pharmaceuticals (up 14% YoY) business. Growth in the pharma business could be attributed to the strong performance of its top ten products, which grew in double digits. Having said that, the company’s top 2 brands namely ‘Corex’ and ‘Becosules’ failed to perform strongly. While ‘Corex’ grew by a tepid 9% YoY, ‘Becosules’ saw a 3% YoY decline in sales. The clinical operations business did well to report a growth of 118% YoY during the quarter. The performance of the animal health business was lukewarm, as this business reported a growth of 9% YoY. This was largely due to the discontinuation of some in-licensed brands. For the nine-month period, the pharmaceuticals and animal health businesses grew by 13% YoY and 7.6% YoY respectively.

    Segmental performance
    (Rs m) 3QCY09 3QCY10 Change 9mCY09 9mCY10 Change
    Pharmaceuticals (incl. services) 1,784 2,038 14.3% 4,963 5,611 13.1%
    PBIT margin (%) 17.6% 32.8%   26.2% 28.7%  
    Animal health (incl. services) 264 289 9.3% 804 865 7.6%
    PBIT margin (%) 20.1% 6.7%   21.1% 19.2%  
    Services - Clinical            
    Development Operations 50 109 118.2% 154 262 69.8%
    PBIT margin (%) 71.9% 10.7%   35.9% 11.4%  
    Total revenues 2,098 2,436 16.1% 5,921 6,738 13.8%
    Total PBIT margin (%) 28.7% 28.7%   25.7% 26.8%  

  • Pfizer’s operating margins fell by 2.2% during 3QCY10 led by a rise in staff costs and other expenditure (as percentage of sales). Staff costs increased from 14.3% of sales in 3QCY09 to 19.5% of sales in 3QCY10. This was largely due to the addition of people to the field force and payment of gratuity. Raw material costs (as a percentage of sales), however, saw a fall from 23.7% of sales in 3QCY09 to 21.1% this quarter. Part of the reason was due to softening of vitamin C prices. For the nine-month period, operating margins declined by 0.5% to 21%. Once again staff costs and other expenditure increased during this period.

  • Net profits grew by 3% YoY during the quarter largely in line with the 2% YoY growth in operating profits. For the nine-month period, led by a 10% YoY growth in operating profits, net profits grew by 7% YoY.

What to expect?
At the current price of Rs 1,100, the stock is trading at a multiple of 17.6 times our estimated CY12 earnings. Pfizer’s operating margins are expected to be under pressure going forward as higher raw material costs play spoilsport. The company has forayed into branded generics in a bid to gain access to a wider market and bolster sales. Eleven products have already been launched in this category last year. 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. Current valuations, however, do not leave much on the table for investors.

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