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Sunday, Jun 16, 2002

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Pfizer: Buy

Sanjiv Shankaran

THE equity market appreciates predictability. The more predictable a company's business, higher the valuation. Amidst uncertainty, a business that promises to be largely predictable is deemed to be worth a high price.

Pfizer, a pharmaceutical company, is one of the safest in the industry. The company's track record is largely free of the factors that put investors on their guard: Raising large amounts of capital, and a presence in many activities. Instead, what we have is a company that operates on a low capital base and sticks to a small area of activity; a couple of ingredients for a relatively predictable business. Given the stability in its business, the valuation may improve over time.

Background: Pfizer Inc, the world's largest pharmaceutical company, owns 40 per cent of the equity in its Indian arm, Pfizer Ltd. Pfizer is a Rs 424-crore company that draws on a portfolio largely stocked by the global associate. Pfizer's profitability is one of the highest in the industry.

Strengths: Pfizer's marketing force is among the best in the industry. Rated high by rivals, Pfizer's marketing force has been able to extract tremendous mileage out of a relatively limited product basket.

A noteworthy feature of the industry is that most large companies have dozens of brands in their product basket. Indian companies introduce a dozen or so brands every year. In this backdrop, Pfizer draws revenue out of a relatively static product basket. The company has a few core brands, such as Becosules (vitamin), Protinex and Corex (cough syrup) that contribute the bulk of its revenue. New product introductions have been relatively limited.

Despite a limited basket, the focus Pfizer's marketing arm has brought to bear on its portfolio has resulted in a sharp growth in profit. The company's operating profitability is about 19-20 per cent — above the industry average.

Concerns: Following a global merger, Pfizer India and Parke-Davis (India) are due to embark on a merger exercise soon. As of now, both companies are under common control, and their operations complement each other. But a legal merger is fraught with uncertainty because of complications associated with the share swap ratio.

Investment outlook: Pfizer's share price is around Rs 484, about 23 times its year ended November 2001earnings per share share (EPS) of Rs 20.26. The company's share price has risen steadily over the last few months. A firm trend is likely to continue for a while because of the following reasons:

The company is likely to maintain its current profit growth rate of about 26 per cent over the next couple of years. As things stand, the valuation does not appear to fully capture the low risk associated with its business. Given the stability in its business, the valuation may improve over time. Once valuation begins to capture all the factors, the share price may climb significantly. Pfizer appears a good investment for patient investors looking to invest in a low-risk business.

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