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Margins impacted by high expenses

Pfizer Limited’s (PFL) reported performance was weak during the quarter with it missing the estimates on all fronts. Revenue grew 6.5% YoY to Rs5.3bn (I-Sec: Rs5.7bn) despite company benefiting from its vitamins/minerals/nutrients (VMN) and gastro-intestinal portfolio. EBITDA margin declined 970bps QoQ to 23.5% (ISec: 30.2%) due to higher S,G&A costs (+32% QoQ).

Adjusted PAT declined 18.8% YoY to Rs796mn (I-Sec: Rs1.4bn). While we remain positive on the company’s growth visibility with exposure only in domestic formulations and strong balance sheet with deep cash reserves, current valuations capture the near term growth, hence, we maintain HOLD with a revised target price of Rs5,035/share.

* Weak performance:

Revenue growth during the quarter was weak at 6.5% YoY on low base of last year despite high demand in the VMN and gastro portfolio. We believe shifting of four products (Amlogard, Lyrica, Viagra and Daxid) to Viatris from PFL in the previous quarter would have had minimal impact. Gross margins declined 80bps QoQ (+150bps YoY) with lower revenue. S,G&A expenses rose sharply by 31.5% QoQ and 16.7% YoY suppressing EBITDA margins by 970bps QoQ (+180bps YoY).

We believe that S,G&A expenses would moderate from this level in the coming quarters with resurgence in COVID-19 cases but still remain higher for the full year with growing travel and marketing and promotional expenses. This should restrict EBITDA margin at ~32-33%. Company has received compensation of Rs275mn for winding down two brands (Anacin & Anne French) from its consumer business as per its global deal with GSK in 2018.

* Key products performance:

As per AIOCD data PFL has grown 3.2%. Becosules, Gelusil MPS, Minipress XL, Mucaine, and Wysolone have reported strong double digit YoY growth of 13.5%, 19.0%, 16.4%, 22.7% and 16.4% respectively. Magnex, Corex DX, Meronem and Prevenar 13 have reported a decline of 21.9%, 20.0%, 31.8% and 13.2%. Eliqius continues its strong performance with a growth of 40.3% YoY for the quarter.

* Outlook:

We believe that business should recover in the coming months supported by its VMN, gastro and cardiac portfolio with some recovery in the vaccine portfolio. High revenue growth should generate some operating leverage but we expect costs to increase from the current levels for the year restricting margin to ~32-33% and minimal capex requirement would help generate FCFF of ~Rs14bn over two years.

* Valuations and risks:

We reduce our revenue estimates by 0-1% and EPS estimates by 2-4% for FY22E-FY23E to factor in lower growth and higher expenses. Maintain HOLD on the stock with a revised target price of Rs5,035/share based on 35xFY23 earnings (earlier: Rs5,143/share). Key downside risks are: addition of key drugs in NLEM, product concentration, government intervention, and presence of unlisted promoter company. Key upside risks are: higher than expected growth and launch of COVID-19 vaccine that is not part of our estimates.

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