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P&G: Growth at the cost of margins - Views on News from Equitymaster
 
 
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  • Jan 23, 2002

    P&G: Growth at the cost of margins

    P&G Hygiene & Healthcare Limited (P&G), is in a fix. Last quarter (September 2001) the company recorded a 3% decline in topline. But due to increased operating margins it managed to finish with a 6% jump in bottomline. This time around, i.e., in December quarter, the company has reported an improved 8% growth in topline. However, this seems to have come at the cost of margins.

    (Rs m) 2QFY01 2QFY02 Change 1HFY01 1HFY02 Change
    Net Sales 1,359 1,471 8.3% 2,560 2,632 2.8%
    Other Income 12 22 93.9% 26 54 112.5%
    Expenditure 980 1,100 12.1% 1,900 1,968 3.6%
    Operating Profit (EBDIT) 379 372 -1.8% 660 665 0.7%
    Operating Profit Margin (%) 27.9% 25.3%   25.8% 25.2%  
    Interest 0 0   1 0  
    Depreciation 70 58 -16.8% 143 122 -15.1%
    Profit before Tax 320 336 4.8% 541 597 10.4%
    Extraordinary items 0 73   0 73  
    Tax 56 102 82.8% 91 168 83.7%
    Profit after Tax/(Loss) 264 306 15.9% 450 502 11.7%
    Net profit margin (%) 19.4% 20.8%   17.6% 19.1%  
    No. of Shares (eoy) (m) 21.6 21.6   21.6 21.6  
    Earnings per share* 48.9 56.6   41.6 46.4  
    Current P/e ratio   8.1     9.9  
    *(annualised)            

    Though the company's topline growth is encouraging, it has had to up its expenditure in a bid to boost sales and to crack down on counterfiet products. As a result, its operating margins have declined by a significant 260 basis points to 25.3% during the quarter. As a result of this, its profit before tax and extraordinary income is up by a marginal 4.8% despite a decline in depreciation provisioning.

    Had it not been for Rs 73 m it earned from gain on sale of property (Rs 49.5 m), profit on sale of investments (Rs 18.9 m) and additional income from divestiture of Clearasil Business (Rs 4.4 m), the company would have recorded a 12% decline in profits, instead of the 16% growth.

    Commenting on the performance Mr. Bharat Patel, chairman, said, "The all around results reflect the outstanding performance in our core categories - Feminine Hygiene and Health care whose sales grew by 18%. In the Feminine Hygiene category, Whisper Ultra continues its unabated growth. In the Health Care category, Vicks particularly Vicks VapoRub has fared well supported by stronger distribution, innovative advertising and the continuing anti-counterfeiting crusade."

    At the current price of Rs 460 the stock trades at a P/E of 10x 1HFY02 annualised earnings. Given the company's focus on operational efficiencies, the valuation is on the lower side. This is probably because of the company's two product dependence as well as concerns regarding the parent's 100% subsidiaries. But apart from this, the company is likely to be one of the key players in both anti-cold and feminine hygiene segment. The company's dividend payout is also attractive.

     

     

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