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P&G: Mixed quarter!

Jan 31, 2007

Performance summary
Procter and Gamble Health and Hygiene (PGHH) have announced its second quarter and half year results (June-ending company). The company’s topline has grown by 7.7% YoY due to divestment of its detergent manufacturing facility to the parent’s unlisted subsidiary, Procter and Gamble Home Products (PGHP) in 1QFY06. It must be noted that the results of the quarter under review cannot be compared to that of the corresponding quarter of the previous year due to the above-mentioned reason. The bottomline has declined by 25.7% YoY due to lower other income and higher tax outgo.

(Rsm) 2QFY06 2QFY07 Change 1HFY06 1HFY07 Change
Net Sales 1,493 1,608 7.7% 3,410 2,911 -14.6%
Expenditure 1,053 1,069 1.5% 2,634 2037 -22.7%
Operating Profit (EBDITA) 439 539 22.6% 775 874 12.7%
Operating Profit margin (%) 29.4% 33.5%   22.7% 30.0%  
Other Income 58 31 -46.5% 101 74 -26.6%
Interest 1 - -100.0% 1 0 -90.9%
Depreciation 15 20 31.8% 42 39 -7.9%
Profit before Tax 481 550 14.2% 833 909 9.1%
Extraordinary item 73     73    
Tax 149 248 66.8% 243 352 45.0%
Profit after Tax/(Loss) 406 302 -25.7% 664 556 -16.1%
Net profit margin (%) 27.2% 18.8%   19.5% 19.1%  
No. of Shares (m) 32.5 32.5   32.5 32.5  
Diluted Earnings per share (Rs)*         39.3  
P/E Ratio (x)*         22.9  
*(trailing 12 months)            

What is the company’s business?
P&G is a 65% subsidiary of the FMCG major, P&G USA. In India, the company is a focused two-product company, dominating both the segments it is present in, backed by strong brands, namely ‘Vicks’ in the anti-cold segment and ‘Whisper’ in the feminine care segment. The parent has two other 100% subsidiaries in India, which have a dominant shampoo (Pantene, Rejoice) and detergent (Ariel, Tide) portfolio. P&G undertakes contract manufacturing for its parent’s detergent portfolio in India.

In July ‘05, the listed entity, PGHH, sold its detergent manufacturing unit at Mandideep in Madhya Pradesh, to the parent’s unlisted subsidiary in India, Procter and Gamble Home Products (PGHP). PGHH carried out contract manufacturing of detergents for PGHP and earned a margin for the same. It must be noted that 1QFY06 was the last quarter in which PGHH carried out contract manufacturing for its parent’s wholly owned subsidiaries, as the detergents plant was transferred to the unlisted entity effective October 1, 2005.

What has driven performance in 2QFY07?
Topline performance: On a YoY basis the sales of PGHH for 2QFY07 have grown by 7.7%. Though the company had divested its detergent manufacturing division in 1QFY06, revenues of Rs 85 m were adjusted in 2QFY06 and hence the performance is not strictly comparable. Excluding this effect the net sales of the core business grew by 14% YoY. The Feminine Hygiene business continued with its strong sales registering a 21% YoY for the quarter. The contribution of the division has gone up from 38% in 2QFY06 to 43% in 2QFY07. The sales of the Health Care business also grew by a healthy 9% YoY at Rs 907 m. The strong performance of the company is on the back of focused marketing initiatives and deeper distribution. In the six-month period ended December 2006, PGHH recorded a topline growth of 17% YoY excluding the manufacturing business sales.

Cost break-up
As a % of net sales 2QFY06 2QFY07 1HFY06 1HFY07
Total Cost of goods 28.5% 21.8% 39.8% 23.2%
Staff Cost 5.1% 6.1% 5.6% 7.1%
Advertising 9.2% 10.8% 8.3% 11.6%
Other Expenditure 27.8% 27.8% 23.5% 28.1%

Higher margins: The operating margins increased by 410 basis points for the quarter. This was mainly due to the divestment of the contract manufacturing division, which yielded very low margins, as compared to the company’s core portfolio. The higher margins are a result of lower raw material prices, which fell significantly as a percentage of sales (21.8% in 2QFY07 as compared to 28.5% in 2QFY06). The advertising expenses increased to 10.8% of its sales due to large marketing initiatives taken by the company to promote its products. This indicates the company’s strategy to largely focus on building its brands to face the competition.

Lower profits: The company’s profits fell by 26% YoY for 2QFY07 despite strong margin expansion. This was mainly due to lower other income and higher tax outgo. Also in 2QFY06, there was an extraordinary item to the tune of Rs 73 m. Excluding this profits have declined by 9% YoY.

What to expect?
At the current price of Rs 900, the stock trades at a price-to-earnings multiple of 22.9 times its trailing 12-month earnings. The company’s core divisions are witnessing strong performance. The poor per capita consumption of the hygiene products among the female population further provides good opportunity for its growth. The company is increasing the capacity of its existing feminine hygiene plant in Goa and building new health care plants in Baddi, Himachal Pradesh to target the large female population. However, since the company just has a two-product portfolio, it is a risky proposition due to increased competition in this segment.


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