Pfizer: Managing costs

Consumer healthcare sales continue to be sluggish.

Pfizer reported lacklustre results for the quarter ended August 31, 2007, as segment revenues in its core pharmaceuticals division declined 3.5 per cent y-o-y.

Senior company management once again attributed this to sluggish consumer healthcare sales in the last quarter, owing to uncertainty in the marketing network, as the division was expected to be divested soon. To the company's credit, it has kept operational costs under check in the August quarter.

As a result, operating profit (including service income) declined 0.9 per cent y-o-y to Rs 47.36 crore in the previous quarter, while total operational income declined 3 per cent to Rs 180 crore. Operating profit margin expanded 60 basis points y-o-y to 26.3 per cent in the August quarter.

The results were declared after the close of trading on Monday and, on Tuesday, the stock closed 1.96 per cent higher at Rs 680.40. Although not strictly comparable, but in the quarter ended May 31, 2007, its operating profit margin had declined 60 basis points y-o-y to 24.1 per cent.

The US parent had earlier announced that it had sold its worldwide consumer healthcare business to Johnson & Johnson and Pfizer India was also expected to exit from the business soon.

For the Indian arm, analysts say this business was contributing 22 per cent to its revenues in the year ended November 2006. Without considering the transfer of the consumer healthcare business and its Chandigarh property sale, the Pfizer India stock trades at about 17 times estimated November 2007 earnings.

Gremach: Coal fired

It is surprising to see a company "" providing construction and earthmoving machinery on a rental basis "" acquiring coal mining licences in Africa. Infrastructure Equipment has bought 75 per cent stake in 11 Mozambique-based coal mines. It may also appear ambitious for a company that made its IPO in Q4 FY07 to diversify so soon.

The Gremach promoters' interest in coal can be attributed to the fact that some of them have also been promoters of Gujarat NRE Coke, but have disassociated from the latter since 1997 owing to a dispute.

Besides, as long as the company strikes coal, the diversification will be remunerative-there is a shortage of coal globally, and the internal rate of return in mining could be higher than 50 per cent, says the management. A Gremach official said two of the mines have access to the highway, which means lower infrastructure and transportation costs.

Mozambique is becoming an attractive destination for coal assets; its hard coking coal, which is high value, is used in steelmaking. Just last month, Tata Steel bought a 35 per cent stake in a Mozambique based coal mining operation for about $85 million, which covers 24,960 hectare.

For Tata Steel, this is a strategic stake as these mines will supply assured supply of coal to its plants in India and the UK. If one were to go by the Tata Steel valuation and assume that it paid a 30 per cent premium to acquire a strategic stake, the enterprise value of Gremach's mines work out to about $100 million.

Gremach, which floated its IPO to expand its equipment rental business and is in a bull phase thanks to the rise in construction activity across the country, does not have this kind of cash. The management will raise debt and equity in an SPV to finance this acquisition, and could rope in a strategic investor interested in sourcing coal.

In its core business of equipment rentals, operating profit margin is on a rise - it was 23.4 per cent in the June 2007 quarter compared with 21 per cent in the previous year.

Besides, there is a shortage of equipment and rentals are rising, which should help Gremach. The stock gained 5 per cent on Tuesday to close at Rs 266.60, and trades at about 17 times estimated FY08 earnings, without factoring in the coal business.