Buy Pfizer, target price Rs 4,705: ICICI Securities

ICICI Securities has given a buy rating to Pfizer with a target price of Rs 4,705. The share price moved down by -1.51 per cent from its previous close of Rs 4081.50. The last traded stock price is Rs 4020.

Pfizer’s Q4FY20 performance was weak during the quarter. Revenue declined 6.3 per cent year on year to Rs 5 billion against the brokerage estimate of Rs 6.3 billion). Revenue was impacted by divestment of two brands in Q3FY20 and COVID-19. Adjusted growth was 3.5 per cent. EBITDA margin declined 650 bps year on year (-310bps quarter on quarter) to 21.7 per cent (lowest in several quarters) due to lower revenue. Adjusted PAT declined 5.9 per cent year on year to Rs 1 billion. Dichotomy between primary and secondary sales continue as AIOCD data suggests revenue growth for the company was 12.5 per cent. The brokerage expects this disparity to normalise in the coming quarters. It remains positive on the company’s growth visibility with exposure only in domestic formulations and strong balance sheet with deep cash reserves.

Investment Rationale

The brokerage believes that the difference between primary and secondary sales would normalise in the coming quarters. However, revenue would remain subdued in the near term impacted by COVID-19 as the company’s product portfolio is largely acute (~75 per cent). Operating leverage would drive margin improvement of 360bps. This would help generate healthy free cash flows of Rs 13 billion over FY21E-FY22E.

Earnings Revision

The brokerage expects Pfizer to witness an earnings CAGR of 10.9 per cent over FY20-FY22E driven by revenue CAGR of 10.7 per cent and EBITDA margin expansion to 30.2 per cent in FY22E from 26.6 per cent in FY20. Return ratios (RoE and RoCE) would improve with margin expansion led by strong growth. The stock currently trades at valuations of 37.6 times FY21E and 30.3 times FY22E earnings and EV/EBITDA multiple of 25.8 times FY21E and 21 times FY22E. It remains 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.

The brokerage has revised its rev/earnings estimates for FY21E-FY22E by 4- 5 per cent/16-22 per cent to incorporate reduced other income post high dividend payout in FY21 and near term uncertainty due to Covid-19. It maintains a buy rating with a revised target price of Rs 4,705/share based on 35 times FY22E EPS (earlier: Rs 5,590/share).

Key downside risks: addition of key drugs in NLEM, product concentration, government intervention, and presence of unlisted promoter company.

Financials

For the quarter ended March 31, 2020, the company reported standalone sales of Rs 502.01 crore, down -6.72 per cent from last quarter sales of Rs 538.18 crore and down -6.28 per cent from last year's same quarter sales of Rs 535.66 crore. The company reported net profit after tax of Rs 103.01 crore in the latest quarter.

Promoter/FII Holdings

Promoters held 63.92 per cent stake in the company as of March 31, 2020, while FIIs held 3.69 per cent, DIIs 12.65 per cent and public and others 19.73 per cent.