Pfizer Limited (PFL) reported an operationally strong performance in the quarter. Revenue grew 10.3% YoY to Rs6.0bn (I-Sec: Rs6.0bn) as company is benefiting from its vitamins / minerals / nutrients (VMN) portfolio in the current environment. EBITDA margin jumped 840bps YoY to 33.2% (I-Sec: 29.8%) driven by lower S, G&A costs and adjusted PAT grew 25.2% YoY to Rs1.4bn.

We remain positive on the company's growth visibility with exposure only in domestic formulations and strong balance sheet with deep cash reserves. Recent price correction has made valuations attractive, hence, we upgrade our rating to ADD from Reduce with a revised target price of Rs5,143/share.

Strong performance: Revenue growth during the quarter seems to have normalised from the impact of COVID-19 led lockdown due to high demand in the VMN portfolio of the company. However, other therapies like vaccines have yet to recover although sequential improvement is visible. Gross margins improved 150bps YoY (-20bps QoQ) led by improved revenue mix. S, G&A expenses declined sharply by 21.0% YoY (-4.3% QoQ) lifting EBITDA margins by 840bps YoY (-100bps QoQ). We believe that S, G&A expenses would increase from this level with growing travel and marketing and promotional expenses thus restricting EBITDA to ~32-33%. Company will be winding down its legacy consumer business including two brands (Anacin & Anne French) as per its global deal with GSK in 2018.

Key products performance: As per AIOCD data PFL has grown 1.6%. Becosules, Mucaine, and Wysolone have reported strong double-digit YoY growth of 21.2%, 22.3% and 14.7% respectively. Magnex, Dolonex, Meronem and Prevenar 13 have reported a decline of 13.6%, 8.3%, 31.5% and 14.5% while Gelusil MPS, Minipress XL and Corex DX have grown in single digit. Eliqius reported a strong growth of 98.8% YoY for the quarter. During the quarter, Upjohn and Mylan were merged to form Viatris at the global level. This would entail shifting of four products (Amlogard, Lyrica, Viagra and Daxid) to Viatris from PFL with minimal impact on the financials.

Outlook: We believe that business recovery would continue in the coming months supported by its VMN portfolio. Although operating leverage would drive margin improvement of 660bps over FY20-23E we expect costs to increase from the current levels restricting margin improvement in the medium term. Healthy performance with minimal capex requirement would generate a free cashflows of ~Rs21bn over FY21E-FY23E.

Valuations and risks: We reduce our revenue estimates by 1-2% for FY21E-FY23E to factor in weak vaccine portfolio. We raise our earnings estimates for FY21E by 4% to factor in higher margins but reduce 2-3% for FY22E-FY23E to factor in lower other income. Recent price correction has made valuations attractive, hence, we upgrade our rating to ADD from Reduce on the stock with a revised target price of Rs5,143/share based on 35xFY23 earnings (earlier: Rs4,963/share). Key downside risks are: addition of key drugs in NLEM, product concentration, government intervention, and presence of unlisted promoter company.