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P&G: Core delivery - Views on News from Equitymaster

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P&G: Core delivery
Feb 4, 2008

Performance summary
  • Strong growth in core business leads to the topline growth of 21% YoY in 2QFY08.
  • Margins fall marginally in 2QFY08 on account of higher raw material costs.

  • Bottomline grew by 54% YoY and 45% YoY in 2QFY08 and 1HY08 respectively.

(Rsm) 2QFY07 2QFY08 Change 1HFY07 1HFY08 Change
Net Sales 1,608 1,941 20.8% 2,911 3,454 18.7%
Expenditure 1,069 1,295 21.2% 2,037 2,330 14.4%
Operating Profit (EBDITA) 539 646 20.0% 874 1,124 28.6%
Operating Profit margin (%) 33.5% 33.3%   30.0% 32.5%  
Other Income 31 35 14.6% 74 78 6.2%
Interest - -   0 0  
Depreciation 20 28 45.6% 39 54 39.0%
Profit before Tax 550 653 18.8% 909 1,149 26.3%
Tax 248 189 -23.7% 352 341 -3.1%
Profit after Tax/(Loss) 302 464 53.6% 558 808 44.9%
Net profit margin (%) 18.8% 23.9%   19.2% 23.4%  
No. of Shares (m) 32.5 32.5   32.5 32.5  
Diluted Earnings per share (Rs)*         35.3  
P/E Ratio (x)*         21.8  
*(trailing 12 months)

What has driven performance in 2QFY08?
  • The topline for 2QFY08 grew by 21% YoY led by strong growth in the feminine hygiene business (up 23% YoY), while the health care segment reported a 15% YoY growth. The feminine hygiene segment contribution to total sales increased to 44% form 42% in 2QFY07. 100% localization of ‘Femcare’ production resulted in full range store availability leading to higher growth.

    Cost break-up
    As a % of net sales 2QFY07 2QFY08 1HFY07 1HFY08
    Total Cost of goods 21.8% 27.6% 23.3% 26.8%
    Staff Cost 4.1% 3.5% 4.8% 4.6%
    Advertising 10.8% 9.4% 11.6% 9.0%
    Other Expenditure 29.8% 26.2% 30.3% 27.2%

  • Inspite of lower labour, ad and other expenses (as a % of sales), the margins declined by 20 basis points in 2QFY08 on account of higher raw material prices, which increased to 28% as a % of sales from 22% in 2QFY07. For 1HY08, the margins are at 32.5% YoY, which are above our estimates.

  • Bottomline grew by 54% YoY in 2QFY08. However, it is not comparable as prior years’ tax adjustment of Rs.107 m was added in the previous year. Without this adjustment PAT grew by strong 13% YoY. For 1HY08, the bottomline grew by 21.5% YoY without the tax adjustment.

What to expect?
At the current price of Rs 769, the stock is trading at a price-to-earnings multiple of 13.9 times our FY10 estimates. With strong brands and sector potential, the company is expected to do well. It is also increasing its capacity to meet the demand. Considering the growth potential, we had recommended a ‘Hold’ with a target price of Rs 992 from a FY10 perspective in November 2007. We maintain our view.

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