Back on track

Pfizer's results indicate revival of demand

The key takeaway from Pfizer India's results for the quarter ended August 2005 is that its core pharmaceutical business has revived after several quarters of lacklustre performance.

Moreover, the company has once again demonstrated the efficacy of its cost management strategies. As a result, profit before exceptional items and taxation grew 80.5 per cent to Rs 43 crore in its quarter ending August 31.

Sales in the key pharmaceutical segment grew about 15.6 per cent to Rs148.86 crore in the last quarter and that was attributed to several factors - sales of Gelusil ( medication for sour stomach and acid indigestion) have shown signs of stabilising in the domestic market. The company had voluntarily recalled stocks of this product in the previous year.

Also, analysts say that there have been signs of an uptick in sales of products such as Corex. In contrast, in the May quarter, sales in this segment for the company fell almost 1.6 per cent on a y-o-y basis to Rs 120.21 crore owing to the VAT imbroglio.

Also, the company's emphasis on deriving marketing and operational efficiencies via the LEAP programme has helped this key segment to grow profit by 53 per cent to Rs 46.02 crore in the August quarter.

As a result, operating profit grew 74.35 per cent to Rs 46.24 crore in the last quarter and operating profit margin expanded 908 basis points to 26.74 per cent.

MNC players such as Pfizer rely overwhelmingly on the domestic market for their sales. And if the company's last quarter results were to be used as a benchmark, it does indicate that domestic demand is showing signs of reviving.

Going forward, the company would need to enhance sales and profit growth to justify the stock's current valuation, which is high at about 35 times estimated earnings for the year ending November 2005.

Infrastructure index

After July's dismal 0.5 per cent growth, the infrastructure index's growth in August has been a respectable 5.7 per cent. The electricity, coal, cement and steel sectors have all grown at a faster pace than in July, but growth has disappointed for refining and crude oil sectors.

There are several one-off factors-ONGC's Bombay High mishap is responsible for the negative growth of 16.1 per cent in crude oil production, while the truckers' strike in August 2004 affected cement production, which has led to cement production growing by a huge 17.8 per cent y-o-y last month.

However, the main reason for the higher growth in August is the base effect-while the infrastructure index rose by 11.1 per cent y-o-y in July 2004, it rose by only 4.4 per cent in August 2004.

It's no wonder then that the index rose by a mere 0.5 per cent in July 2005 and 5.7 per cent in August. Next month's rise may be muted because the index had risen by 7.1 per cent in September last year.

But apart from the monthly variations, what can't be denied is that last year, the infrastructure index rose by 6.4 per cent between April and August, while it has risen by 5.1 per cent over the same period this year.

While cement has done very well this year, thanks mainly to negative growth in several months in 2004, coal and steel production growth too has been higher. It's basically the oil sector that has performed worse, with negative growth this fiscal in both crude oil production and petroleum refining.

3i Infotech: Cheap acquisition

3i Infotech's acquisition of Innovative Business Solutions Inc has come rather cheap at 0.5 times annual sales. 3i Infotech has said it will pay $3.6 million for IBS Inc, which had annual revenues of $7.2 million.

What's more, Innovative Business Solutions is reported to have net margins of 12 per cent, which means that the acquisition price works out to just 4.2 times earnings.

The markets, too, cheered the move, with the stock ending the day 8.9 per cent higher. But it's important to note that the size of the acquisition is relatively small compared with 3i's current size. 3i's trailing 12-month earnings was Rs 316 crore ($72 million), which means that IBS Inc would add only 10 per cent to the company's size.

3i has net margins of 11 per cent, rather similar to IBS's net margin of 12 per cent. The addition to 3i's net profit, too, should be in the region of 10 per cent. While the acquisition would be EPS accretive, the addition is nothing to be excited about.

What's more important is that IBS brings with it about 15 clients in business intelligence, IT security consulting and enterprise application integration. While 3i already operates in these business areas, it has a negligible presence, which too is in the Middle East and in India.

The US-based IBS would give it exposure to the West, within these three business areas. Also, since IBS has only 75 employees on its rolls, integration should not be high.

With contributions from Amriteshwar Mathur and Mobis Philipose