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P&G: Higher costs weigh on performance
Jan 31, 2011

Procter & Gamble Hygiene and Health Care Ltd. has announced its 2QFY11 results. The company has reported an 8.5% YoY growth in sales and a 40.2% YoY fall in net profits. Here is our analysis of the results.

Performance summary
  • Top line grew by 8.5% YoY during the quarter. This performance comes on the back of 15% YoY volume growth. However, increase in excise duty played spoilsport resulting in fall in realization.
  • Operating (EBITDA) margins for the company fell by 16.7% to stand at 18.6%. This fall in operating margins was due to sharp increase under all heads of operating costs except staff costs (as a percentage of sales) during the quarter.
  • Net profit for the quarter fell by 40% on the back of lower operating income, partially offset by higher other income, and lower effective tax rate.

Rs(m) 2QFY10 2QFY11 Change 1HFY10 1HFY11 Change
Net sales 2,751 2,986 8.5% 5,009 5,272 5.3%
Expenditure 1,781 2,431 36.5% 3,342 4,352 30.2%
Operating profit (EBDITA) 970 555 -42.8% 1,667 920 -44.8%
EBDITA margin (%) 35.3% 18.6%   33.3% 17.5%  
Other income 56 79 42.2% 106 166 55.8%
Interest 0 0   0 -  
Depreciation 46 54 17.9% 106 102 -3.4%
Profit before tax 980 580 -40.8% 1,667 984 -41.0%
Extraordinary inc/(exp) - -   - -  
Tax 235 135 -42.7% 407 221 -45.8%
Profit after tax/(loss) 745 446 -40.2% 1,260 763 -39.4%
Net profit margin (%) 27.1% 14.9%   25.2% 14.5%  
No. of shares (m) 32 32   32 32  
Diluted earnings per share (Rs)*         40.1  
Price to earnings ratio (x)*         40.9  
*trailing twelve months

What has driven performance in 2QFY11?
  • Sales of Procter & Gamble Hygiene and Health Care (PGHH) grew by 8.5% YoY during the quarter. This is in spite of a 15% YoY volume growth. Both the feminine hygiene business and the health care business turned in a strong growth driven by Whisper Ultra, Whisper Choice and Vicks. The lower growth in value terms was a result of price cuts and increase in excise duty.

  • Operating income for the quarter fell by 42.8% YoY. This was because of increase in raw material costs, rise in advertisement expenditure and higher other expenditure, partly offset by lower staff costs (all as a percentage of sales). Costs of goods sold increased by 36% YoY while advertisement expenditure was up by 57% YoY. Other expenditure rose by 38% YoY during the quarter. Staff costs fell by 21% YoY.

  • Net profit for the quarter fell by 40% on YoY basis while net margins fell by 12.2% to stand at 14.9% in December 2010. This performance was due to fall in operating expense. However, higher other income (up 42% YoY) and fall in effective tax rate (from 24% in 2QFY10 to 23.2% in 2QFY11) helped cap the fall in the bottom line.

    Cost break-up
    As a % of net sales 2QFY10 2QFY11 1HFY10 1HFY11
    Total Cost of goods 30.6% 38.3% 32.7% 38.1%
    Staff Cost 4.9% 3.6% 4.5% 4.3%
    Advertising 13.4% 19.4% 13.3% 20.2%
    Other Expenditure 15.9% 20.1% 16.2% 19.9%

What we expect?
At a price of Rs. 1,639, the stock is trading at 20 times our estimated FY13 earnings. (RPro subscribers click here). The company is the market leader in both the segments it operates in. We believe that PGHH has good growth potential because of its presence in the feminine hygiene market which remains under penetrated. However, the company has been facing cost pressure for 3 consecutive quarters now. Given that the valuations of the company are still on the higher side, we would advise investors to exercise caution.

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