Pfizer - Strong margin improvement - Centrum

Pfizer's revenues and EBIDTA for Q1FY14 were marginally below our expectations but net profit was in line. The company reported a growth of 10%YoY in revenues, 430bps in EBIDTA margin and 56%YoY in net profit before EO items. As per AIOCD data, Becosules, Magnex and Minipress-XL reported over 20% growth. The company has re-structured its marketing function based on therapeutic categories leading to an improvement in EBIDTA margin. Pfizer is unlikely to get majorly impacted by the New Pharma Pricing Policy (NPPP) as seven of its eight major brands will be outside price control. The company has cash per share of Rs480. We have a Buy rating for the scrip and revised target price from Rs1,397 to Rs1,494 (based on 17x FY15 EPS of Rs87.9).

Moderate Revenue growth: Pfizer reported 10%YoY growth in revenues from Rs2.43bn to Rs2.66bn in Q1FY14. The company's pharma business was flat at Rs2.18bn. Pfizer Animal Pharma Private Ltd (PAPPL) revenues grew by 865%YoY from Rs20mn to Rs193mn. Other operating income including from services grew by 25%YoY from Rs228mn to Rs286mn.

Strong margin improvement: Pfizer's margin for Q1FY14 grew by 430bps from 12.5% to 16.8% due to the decline in personnel and other expenses. Its material cost increased by 280bps from 29.8% to 32.6% of revenues due to the change in product mix and an increase in imported material cost with the depreciation of the rupee. Personnel cost declined by 170bps from 24.2% to 22.5% due to the restructuring of the marketing function. Other expenses declined by 540bps from 33.5% to 28.1% of revenues. Personnel cost for the quarter included VRS of Rs 89mn against Rs14mn. Excluding VRS, EBIDTA margin would have grown by 700bps from 13.1% to 20.1%.

Major brands performing well: As per AIOCD AWCS data-MAT June'13, Pfizer was ranked No.12 and grew at 10.3% against the industry growth of 9.8%. Pfizer's four brands grew faster than the market. These were, Becosules 20.7%, Magnex 24.2%, Minipress-XL 25.8% and Claribid 11.8%. We expect these brands to drive future growth for the company.

Debt-free, cash rich company: Pfizer is a debt-free, cash rich company with cash/share of Rs480 as on 31st March'13. The company's other income grew by 21%YoY from Rs252mn to Rs305mn mainly due to the rise in treasury income.

No major hit from NPPP: Pfizer is unlikely to get impacted by NPPP as seven of its eight major brands will be out of price control. One major brand Solu Medrol will be under price control. However, Pfizer only distributes this brand to 100% subsidiary of the parent company. Pfizer will get hit by NPPP for ~Rs100mn on another brand Amlogard.

Valuations: We expect Pfizer to report good growth after the implementation of NPPP due to its strong brands and expected volume growth for brands witnessing price fall. At the CMP of Rs1050, the stock trades at 14.0x FY14E EPS of Rs75.2 and 11.9x FY15E EPS of Rs87.9. We have a Buy rating for the scrip with a revised target price of Rs1,494 (based on 17x FY15 EPS of Rs87.9), an upside of 42.3% over the CMP.

Source : Equity Bulls

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