P&G: Challenges ahead

Procter & Gamble Hygiene and Healthcare Ltd. (PGHH) has witnessed a steep decline in its price over the last one-year. The company’s falling brand image and increasing competition is a real concern making the stock an under-performer.

PGHH’s topline growth in the last two years slowed down to a single digit due to stiff competition in the markets from low priced packs. Also the unorgainsed sector gave a tough time to the company.

Its strategy of focusing on premium segment of the market has however led to a continuous improvement in its operating margins (25.8%), which are among the highest in the FMCG industry. While the company’s revenues grew at a compounded annual growth rate of 6.2% in the past 5 years, profits showed an encouraging growth rate of 27.5%.

PGHH’s focus on two brands is a concern considering the drop in the topline growth. During the first half of the year ended June ’01, the company’s sales inched up by just 1%. However, the company managed to put in a good performance by improving its operations. PGHH improved its operating margins by 360 basis points (3.6%) in the time frame of 6 months by controlling expenditure. It also pruned its debt burden. As a result, its interest costs were zero during the quarter. These operating and working capital efficiencies fueled its profits growth by 26% during the first half of the year.

At the current market price of Rs 590, PGHH is trading at a P/E of 14 times its June 2001 projected earnings, which is at a significant discount compared to its peers in the industry. Its markets cap to sales ratio of 2.5 times is however in line with other companies. The stock is given low valuation by the markets because the company is highly dependent on two brands. Global competitors in healthcare and feminine hygiene category are waiting in the wings to enter the Indian market with superior products based on the latest technology. PGHH is positioning itself to face the challenges by making operational changes and focusing on the long-term strategic benefits, which its present brand offers.

The risk of a limited product profile is not likely to affect PGHH's topline growth since the company is the market leader in both the brands and is continuously investing in brand promotion and innovation to maintain its position. For PGHH it is very challenging to bring back the real glory in both its main brands i.e. ‘Vicks’ and ‘Whisper’. Growth in both these brands would really bring the de-risking perception among the investors, and help re-rate its business from the present levels.