Sunday, September 9, 2012

>PFIZER: Focus on expanding branded generics

Riding the brandwagon; Initiating with a Buy

Continued support from a strong parent and brand equity are Pfizer’s backbone. Focus on expanding branded generics business in emerging markets and higher productivity on account of field force addition in past two years are key growth drivers, going forward. Further, the company’s strong cash position is sure to give it enough leverage to grow the inorganic way. Thus, we initiate coverage on Pfizer with a Buy rating and price target of `1,518.

 Strong parentage and formidable product profile. Pfizer has strong virtues arising from its lasting relationship with parent, Pfizer, Inc. (US) Its product kitty comprises many established brands like Corex, Gelusil, Becosules, Magnex – all ranking among the top-three in their therapeutic areas. Over the years, these products have endowed Pfizer with sustainable revenues growth (14.1% CAGR over FY09-12).

 Branded generics a key growth driver. We expect 13.3% CAGR in revenues over FY12-15 in its domestic pharma segment, in line with the industry growth rate. Revenue growth will be primarily aided by a higher share of branded generics, up from 5% currently to 10% by FY15, in our view. Other products are likely to continue posting steady volumes.

 Strong balance sheet and return ratios. Pfizer has net cash of ~`13bn on its books (~35% of market cap), which gives it adequate leverage to grow inorganically. With no major capex plans in the immediate future,
we expect its core business RoE and RoCE (excl. cash) to improve to over 30% from 25% currently, led by steady net profit growth.

 Valuation. The stock is trading at attractive valuations of 17.8x FY13e and 15.6x FY14e earnings. We value it at `1,518, based on 20x Dec’13e core earnings and `428 for the cash balance (considering 15% discount). Risks: Proposed new pricing policy and keener competition in generics.

To read report in detail: PFIZER