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P&G: Restructuring benefits…

Mar 4, 2003

P&G Hygiene and Healthcare Limited (PGHH), the two product focused FMCG company (Vicks and Whisper), has had a lacklustre first half in FY03 (the company follows June year ending for accounting). In the period from July - December 2002, the company has reported a marginal 1.3% topline growth, and only 3% bottomline growth.

(Rs m) 2QFY02 2QFY03 Change 1HFY02 1HFY03 Change
Net Sales 1,349 1,361 0.9% 2,399 2,430 1.3%
Other Income 22 5 -78.0% 54 53 -3.1%
Expenditure 977 909 -6.9% 1,735 1,715 -1.2%
Operating Profit (EBDIT) 372 452 21.5% 665 716 7.7%
Operating Profit Margin (%) 27.6% 33.2%   27.7% 29.4%  
Interest 0 0 - 0 0 -
Depreciation 58 31 -47.3% 122 62 -48.7%
Profit before Tax 336 426 26.9% 597 706 18.2%
Tax 102 92 -9.6% 168 177 5.6%
Extraordinary items 73 -13 - 73 -13 -
Profit after Tax/(Loss) 306 320 4.6% 502 516 2.7%
Net profit margin (%) 22.7% 23.5%   20.9% 21.2%  
No. of Shares (eoy) (m) 21.6 21.6   21.6 21.6  
Diluted Earnings per share* 56.6 59.2   46.4 47.7  
Current P/e ratio   6.5     8.1  

However, cost controls saw the company expanding its operating margins to 29.4% during 1HFY03. An almost 50% dip in depreciation costs saw probit before tax grow by 18% during the period. Depreciation provisioning has gone down as the company sold its Hyderabad factory assets to a contract manufacturer in January 2003. There will be no profit hit to the company on this transaction. Procter & Gamble Singapore will reimburse the PGHH the separation expenses and loss on sale of the assets.

Extraordinary items in 1HFY03 (Rs 13 m) is the net of reversal of expenses of prior years (Rs 40 m) and impairment of Honda factory assets no longer in use (Rs 53 m). The dip in depreciation is also on account of this impairment in assets. If we exclude the extraordinary items, then P&G Hygiene's net profit has improved by an encouraging 24% YoY. So PGHH is following the industry trend, wherein its focusing on restructuring its operations to become more profitable, when topline growth is hard to come by.

Given PGHH’s clear strategy on focusing on two products with premium positioning, the company in the past has continually clocked double-digit growth figures both in topline and bottomline. However, increasing competition is the sanitary napkins market as well as in the anti-cold segment has taken a toll on growth of the company. In FY02, the company finished with a measly 0.4% topline growth, as it has been forced to either reduce its premium on products or offer schemes to boost sales (at one time, a campaign which gave 20% off on 'Whisper' was being run). P&G is also not as strong as the Unilever subsidiary, HLL, in distribution. Of course, both its products have an urban appeal and to that extent distribution strength is not comparable.

At the current price of Rs 385, the stock trades at 8.1x annualised 1HFY03 earnings and a market cap to sales of 1.7x 1HFY03 earnings. Though the valuation of the company is on the lower side of the FMCG spectrum, the parent's other Indian subsidiaries, the company's niche presence and continuing pricing pressure on its products are the negating factors for investors. Nevertheless, on the positive side, the company is a good dividend payer (it has paid Rs 40 per share as dividend twice in the last four years). Also, the parent may opt to go in for a buyback if the valuations continue to remain sluggish.

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