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Cost-control supports margins

Pfizer’s Q1FY23 performance beat our estimates on the profitability front driven by strong control over costs. Revenues declined 20.9% YoY (+7.9% QoQ) to Rs5.9bn (I-Sec: Rs.5.9bn) on a high covid-led base. EBITDA margin expanded 230bps QoQ to 32.4% (I-Sec: 30.5%) on account of operating leverage. AdjustedPAT fell 32.6% YoY (on a high base) to Rs1.3bn (I-Sec: Rs1.2bn). We remain positive on the company’s growth visibility with exposure only in domestic formulations and strong balance sheet with deep cash reserves. We believe nearterm growth would be driven by growth in VMN and cardiac segments and recovery in the vaccine segment. Reasonable valuations enhance our positive view, hence we maintain BUY with a revised target price of Rs5,372/share (earlier: Rs5,224).

* Business review: Revenues declined 20.9% YoY on the high covid-led base of Q1FY22. However, it grew 7.9% sequentially driven by seasonality. Gross margin expanded by 20bps YoY (-190bps QoQ) to 63.7%. EBITDA margin contracted by 570bps YoY, but grew 230bps QoQ aided by strong cost-controls and operating leverage. Pfizer has managed to keep employee expenses in check over the past few quarters and we expect the voluntary retirement scheme (VRS) to further decrease the cost base going forward. However, we expect SG&A expenses to ramp-up in the near-term as the company invests more towards marketing and promotion, which would restrict the EBITDA margin to ~32-33% over the next two years.

* Performance of key products: As per secondary sales data, Pfizer’s sales declined 13.8% YoY. Among top brands, Meronem and Minipress-XL reported double-digit growth of 28.6% and 12.9% respectively, while Dolonex grew 7.9% YoY. Corex DX, Becosules and Gelusil MPS reported double-digit decline of 33.6%, 25,4% and 15.2% respectively. Magnex and Prevenar-13 reported declines of 5.5% and 3.1% respectively.

* Outlook: We believe business should continue to grow in the coming months supported by VMN and cardiac portfolios. Revenue growth should generate some operating leverage, but we expect costs to remain elevated restricting EBITDA margin to ~33%. Minimal capex requirement would help generate FCFF of ~Rs15bn over FY23E-FY24E.

* Valuations and risks: We increase our EPS estimates by 2-3% respectively for FY23E-FY24E to factor-in lower employee expenses on account of VRS. Maintain BUY with a revised target price of Rs5,372/share based on 34x FY24E earnings (earlier: Rs5,224/share on 34xFY24E). Key downside risks: Addition of key drugs in NLEM, product concentration, government intervention, and presence of unlisted promoter company.

Valuations

We expect Pfizer to witness an earnings CAGR of 8.6% over FY22-FY24E driven by revenue CAGR of 8.9% with EBITDA margin remaining stable at ~33%. Return ratios (RoE and RoCE) would improve on the back of growth. Stock currently trades at valuations of 29.9x FY23E and 26.5x FY24E earnings and EV/EBITDA multiple of 18.7x FY23E and 16.4x FY24E. We remain positive on the long-term outlook considering the company’s strong growth trajectory led by the next set of power brands, healthy return profile and rich cash reserves. Maintain BUY with a revised target price of Rs5,372/share based on 34x FY24E earnings (earlier: Rs5,224/share on 34x FY24E)

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