Pfizer India: Right dose

Strong demand helps Pfizer India offset rising costs

Pfizer India's quarter ended August 2006 reinforces the continued strength in the demand for medications, which has helped it offset rising costs.

Pfizer India has seen its operating profit (including service income) improve by 18.2 per cent y-o-y to Rs 47.79 crore for the quarter ended August 2006 compared with 9.5 per cent growth in operating income to Rs 185.6 crore.

The company's operating profit margin also grew by 190 basis points y-o-y to 25.7 per cent in the August quarter. Even in the May quarter, its operating profit margin had grown by 236 basis points.

In the key pharmaceuticals division, segment revenues grew by 9.8 per cent y-o-y to Rs 163.45 crore in the August 2006 quarter.

Analysts point out that sales growth in this segment has been provided by Gelusil (antacid), thanks to its sales showing signs of stabilising.

Also, its recent products launches such as Viagra and Lyrica (medication for management of neuropathic pain) saw improved offtake, add analysts.

However, input costs also went up in the last quarter. The purchase of finished goods rose a staggering 61.4 per cent to Rs 32.6 crore in the August 2006 quarter.

Analysts highlight that this was largely owing to increased sourcing of finished products purchased from its parents' global operations.

The company was able to offset the rise in costs in the last quarter via higher income. In the May 2006 quarter too, the company had seen its purchase of finished goods rise 29.9 per cent y-o-y to Rs 26.34 crore.

The US parent had earlier announced that it had sold its worldwide consumer healthcare business to Johnson & Johnson, and Pfizer India too will exit from this business shortly.

For the Indian arm, this business""which has products such as Benadryl, Listerine and Gelusil-""it was estimated to provide Rs 140 crore or about 23 per cent of the company's total revenues for the year ended November 2005, highlight analysts.

The stock trades at about 25 times estimated November 2006 earnings (excluding the impact of hiving off the consumer healthcare business), it leaves not much room for further upside.

Steel concerns

The threat of Chinese steel swamping global markets is once again gaining strength, given the recent release of production data by the Brussels-based International Iron and Steel Institute.

According to the industry body, Chinese steel output grew a whopping 17 per cent y-o-y to 36.7 million tonne in August 2006. Also, between January and August 2006, Chinese output grew a staggering 18.6 per cent y-o-y to 272.5 million tonne.

To curb Chinese steel exports which grew 22 per cent in H1 CY06, the Chinese government has recently cut the export rebate from 11 to 9 per cent, but that is not expected to have much impact on exports.

Analysts say that as the Chinese government has also implemented several steps to curb domestic steel demand, it leaves Chinese manufacturers dependent on export markets.

Domestic steel players had announced a cut of Rs 700-1,000 a tonne to around Rs 26,000 for hot rolled coil (HRC) in the first week of September 2006. With the monsoon season over, domestic construction and infrastructure activity is expected to rebound once again.

And, with shipping dry bulk freight rates rising, analysts were unanimous that it may result in Chinese players diverting increased output to India and other Asian countries rather than Western markets.

Investors also appear cautious to the steel sector, with stocks getting a very low discounting "" Tata Steel trades at 6.5 times estimated FY07 earnings, while for SAIL it is 5 times.

SpiceJet: Turbulent weather

A writeback of unclaimed payables of Rs 18.9 crore helped SpiceJet keep down losses for the August quarter to Rs 17.8 crore, though this was still higher than the Rs 13.5 crore posted in Q4 FY06.

With no aircraft added this quarter, which is the weakest for airlines, net sales grew 178 per cent y-o-y to Rs 159.5 crore, but just 7 per cent q-o-q. The loss at the EBITDA level was Rs 35.2 crore compared with a loss of Rs 16 crore in Q4 FY06.

While high aviation fuel costs""prices were up 32 per cent y-o-y""were the main culprit, the load factor too was down at 82 per cent from 87.5 per cent in Q4 FY06.

However, both loads and yields are likely to pick up in the November and February quarters given the holiday traffic. Besides, fuel costs should come off by about 10 per cent in the current quarter.

Yields, according to the management are up 20 per cent in the current quarter, and two more aircraft will be added soon. Revenues from ancillary services currently at around 7 per cent of total revenues, are likely to go up to 10 per cent by the end of FY07.

The company has also started doing hotel bookings a few weeks back and is looking to start on-board advertising. SpiceJet has tied up the funding for 22 aircraft""it will have 28 aircraft by end 2008.

At Rs 43, the stock is not expensive at 9 times estimated FY07 earnings, given that the company has been faithful to the LCC model and has managed to keep loads at 80 per cent.

With contributions from Shobhana Subramanian and Amriteshwar Mathur