Pfizer Limited’s (PFL) Q3FY22 result was above our estimates across parameters. Revenue grew 13.9% YoY to Rs6.8bn (I-Sec est : Rs.6.4bn) led by strong growth in the anti-infectives, gastro and respiratory portfolio. EBITDA margin contracted 430bps YoY (-90bps QoQ) to 28.9% (I-Sec est : 28.5%) led by normalization of ground-level expenses and cost inflation. Adjusted PAT grew 1.9% YoY to Rs1.4bn (I-Sec est.: 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. Recent correction in the stock price makes valuations attractive; hence, we upgrade to BUY with a revised target price of Rs5,314/share.

• Business review: Revenue growth during the quarter was at 13.9% YoY led by traction in key brands across anti-infectives, gastro and respiratory portfolio. While Becosules demand seems to have normalized, the recent increase in covid-19 cases may provide short-term benefit for the product. Gross margins shrank 170bps YoY (- 60bps QoQ). EBITDA margins contracted 430bps YoY and 90bps QoQ on account of normalization of expenses. We believe SG&A expenses would remain elevated in the near term as the company invests more toward marketing and promotions. Travel expenses would also rise with easing of covid-19 cases and rising vaccination. Apart of this, cost inflation is also likely to impact near-term margins. We expect EBITDA margin to remain stable at ~32-33% over next two years.
• Key products performance: As per IQVIA data, PFL has grown 6.3% YoY and top 10 brands grew 8.7%. Among top brands, Magnex, Corex DX and Meronem reported growth of 21.1%, 38.1% and 34.2%, respectively. Mucaine and Minipress-Xl reported double-digit growth of 13.9% and 15.2%, respectively. Gelusil-MPS, Dolonex and Wysolone have reported 1.5%, 6.8% and 9% growth, respectively. On the other hand, Becosules reported a decline of 6.5% YoY on a high base.
• Outlook: We believe that business should continue to grow in the coming months supported by its VMN, gastro and cardiac portfolio. Revenue growth should generate some operating leverage but we expect costs to remain elevated restricting margin to ~32-33%. Minimal capex requirement would help generate FCFF of ~Rs16bn over FY23E-24E.
• Valuations and risks: We cut earnings estimates by 2-3% for FY23E-FY24E due to marginal tweak in revenues and operational cost estimates. The recent corrections in stock prices make valuations attractive, and hence, we upgrade to BUY with a revised target price of Rs5,314/share based on 34x Sep’23E earnings (earlier: Rs5,178/share on 35x FY23E). Key downside risks are: addition of key drugs in NLEM, product concentration, government intervention, and presence of unlisted promoter company

Table 1: Q3FY22 performance

(Rs mn, year ending March 31)

Valuations

We expect PFL to witness an earnings CAGR of 17.1% over FY21-FY24E driven by revenue CAGR of 12.8% with EBITDA margin remaining stable at ~32-33%. Return ratios (RoE and RoCE) would improve led by growth. The stock currently trades at valuations of 31.5x FY23E and 27.4x FY24E earnings and EV/EBITDA multiple of 20.1x FY23E and 17.3x 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. Recent corrections in stock prices make valuations attractive and hence, we upgrade to BUY with a revised target price of Rs5,314/share based on 34x Sep’23E earnings (earlier: Rs5,178/share on 35x FY23E)