Buy Pfizer India, target Rs 965: Kotak Securities

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Kotak Securities is bullish on Pfizer India and has maintained buy rating on the stock with target price of Rs 965.

 

Kotak Securities research report on Pfizer  India

 

Highlights

 

Pfizer has announced its quarterly results for Q3CY07, which are slightly disappointing at the revenue level. Net sales fell 1.6% to Rs.1.76 billion from Rs.1.78 billion. Reported net profit was up 9.8% to Rs.308 million as compared to Rs.281 million; 

 

Adjusted net profit on pre-exceptional basis was, however, up 19.1 to Rs.404 million; The pharma and consumer healthcare business fell 3.5% to Rs.1.58 billion. The animal healthcare business rose 18% to Rs.179 million and income from clinical development services declined 38.1% to Rs.43 million; The sluggishness in consumer healthcare business owing to uncertainty in the marketing network led the fall in overall pharma business; The management is evaluating the various options available for the smooth restructuring of the consumer healthcare business; 

 

The company is likely to launch a couple of new products by the next quarter in the cardiovascular segment; Income from clinical development operations are likely to remain under pressure due to severe competition from Korea, Malaysia and Indonesia; Patented products, which require a larger field force and/or manufacturing, are likely to be launched through the listed entity; We maintain buy with a price target of Rs.965. We think there is an upside potential to our target price, if the consumer business is hived off to shareholders.

 

Subdued revenue performance; net sales down 1.6%

 

Pfizer has announced its results for Q3CY07 ending on August 31 2007, which are slightly disappointing at the revenue level. Net sales during the period were down by a marginal 1.6% to Rs.1.76 billion from Rs.1.78 billion. The pharma and consumer healthcare business registered a marginal decline of 3.5% to Rs1.58 billion.

 

The animal healthcare business grew 18% to Rs.179 million. The management had guided that it will grow at rate of about 10% in CY07. Adjusted net profit after tax (on pre-exceptional basis) grew 19.1% at Rs.404 million, compared to Rs.339 million in Q3CY06, leading to earnings per share of Rs.13.5. The key reason for higher growth in net profit was improvement in operating margin. Reported net profit after tax grew at a lower rate 9.8% at Rs.308 million. This was due to an amount of Rs.69.5 million, being compensation paid under VRS during the quarter, fully charged to net profit. For nine months CY07, net sales rose only 0.8% at Rs.4.95 billion and pre-exceptional net profit grew 10.2% to Rs.1.04 billion.

 

New products launch may be through listed entity

 

The company is targeting 14% compounded revenue growth (for continuing business) and a 500 bps expansion in EBITDA margin by CY10. New launches through the parent's portfolio as well as launch of patented products from CY08 onwards will be key revenue drivers. EBITDA margins are likely to improve from the existing 25% to about 30% by CY10 led by higher revenue growth, outsourcing of manufacturing and cost reductions in the distribution/supply chain areas. The management has reiterated that patented products, which require a larger field force and/or manufacturing, are likely to be launched through the listed entity while some of the other products could be launched through the parent's 100% subsidiary

 

Likely to have Rs.10 billion cash on balance sheet by CY07

 

The company had about Rs.3.1 billion of cash on its balance sheet for the year ended November 2006. Further, it has received Rs.2.27 billion (net of tax) from the sale of its Chandigarh property in March 2007. We expect the sale of the consumer healthcare business to fetch around Rs.3.5-4 billion (assuming consideration of 3x sales as compared to the global divestment, which happened at 4x sales). The company is also likely to generate operating cash flow of about Rs.1.0 billion in CY07. We estimate the cash balance at about Rs.10 billion by CY07, which is about 50% of current market capitalization or Rs.335 per share. We believe the company can utilize this surplus cash for various purposes like company or brand acquisition, share buyback and one-time large dividend.      

 

Valuation & Recommendation 

 

The company has registered 10% and 38% growth in revenues and net profit, respectively, in CY06. We expect 10% and 15% revenues and earnings, CAGR over CY07 and CY08, respectively. The company has posted adjusted EPS of Rs.43.5 in CY06. We expect the adjusted EPS of Rs.48.4 and Rs.57.3 in CY07 and CY08, respectively. 

 

At the current market price of Rs 680, the stock is trading at 14.1x CY07 and 11.9x CY08 earnings estimate. We maintain buy with a target price Rs 965.