Saturday, May 26, 2012

>PFIZER: benefits from restructuring (Q4FY12 RESULTS)

Pfizer’s Q4FY12 results were below our expectations. The company reported 17%YoY sales growth against 15% for the industry. The results of the two quarters are not comparable as the previous quarter of 4m period ended 31st March’11. Pfizer’s EBIDTA margin declined by 400bps YoY from 22.8% to 18.8% due to sharp increase in imported material cost with the depreciation of rupee. Pfizer has written off stocks and sales returns of Rs150mn of its insulin formulations. The company’s other income grew by 15%YoY from Rs206mn to Rs237mn. Net profit grew by 2%YoY. The company has hived off its animal healthcare (AHC) business into a 100% subsidiary for Rs4.4bn in line with the global divestment. Pfizer is a debt-free company and has cash per share of Rs290. We have retained Buy rating for the scrip with a target price of Rs1364 (based on 17x FY14E EPS of Rs80.2).

Strong revenue growth: During the quarter, the pharma business (80% of revenues) grew by 15%YoY, AHC (13% revenues) grew by 11% and services income (7% revenues) grew by 17%. The growth of pharma business was in line with the market growth of 15%. Pfizer has written off stocks and sales returns of ~Rs150mn of its insulin business.

Margin under pressure: Pfizer reported 400bps drop in EBIDTA margin from 22.8% to 18.8% due to sharp increase in material cost. Pfizer’s material cost increased by 670bps from 26.6% to 33.3% of revenues due to the increase in cost of imported raw materials, with the depreciation of rupee. The PBIT margin of pharma business dropped by 200bps YoY from 27.0% to 25.0%. PBIT margin of AHC declined by 980bps from 28.3% to 18.5%. However, the PBIT margin of services income grew by 190bps from 8.0% to 9.9%.

New products to drive growth: During the quarter, Pfizer introduced 7 branded generic products. With this the company has launched 21 branded generic products in the domestic market. These products are likely to be future growth drivers of the company.

Hives off AHC business: Pfizer has hived off its AHC business into a separate 100% subsidiary for a consideration of Rs4.4bn. Around 250 MRs will be transferred along with the business. The company will pay long-term capital gains tax of ~21% on this transaction. AHC is a low margin business and hence the overall margin is likely to improve.

Attractive valuations, Reiterate Buy: We expect Pfizer to benefit from the launch of branded generics and hiving-off of low margin AHC business. We have revised the EPS estimates downwards by 9% for FY13 and 13% for FY14. At the CMP of Rs1164, the stock trades at 16.4x FY13E EPS of Rs71.1 and 14.5x FY14E EPS of Rs80.2. We retain the Buy rating for the scrip with a target price of Rs1364 (based on 17x FY14 earnings of Rs80.2).