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P&G: Past, present and future…

Mar 28, 2005

Procter and Gamble Hygiene and Health Care Limited (PGHH) is the listed Indian arm of Procter and Gamble company USA, which is focused on the twin businesses of health care and feminine hygiene. Under its belt it has two brands namely 'Vicks' and 'Whisper'. Let's take a look on how the company has performed over the past 5 years. Background
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 segments backed by strong brands, namely 'Vicks' in the anti-cold segment and 'Whisper' in feminine care segment. PGHH's Whisper leads the premium segment with over 40% value market share. Johnson & Johnson is the main competitor and the market leader in volume terms. The parent has two other 100% subsidiaries in India, which have a well-known shampoo (Head & Shoulders, Pantene, Rejoice) and detergent portfolio (Ariel, Tide). P&G undertakes contract manufacturing for its parent's detergent portfolio in India.

Over the years…
(Rs m) FY01 FY02 FY03 FY04 FY05E CAGR
Net Sales 4,100 4,094 4,382 5,772 7,163 15.0%
Other income 88 149 148 150 206 23.8%
Expenditure 3,113 3,091 3,468 4,519 5,343 14.5%
EBDIT 1,075 1,152 1,063 1,403 2,026 17.2%
OPM% 26% 28% 24% 24% 28%  
Net Profit After Tax(loss) 827 770 680 922 1,362 13.3%
Contract Manufacturing*   1,199 1,270 2,050 2,735 31.6%
* In FY02, manufacturing of soaps and detergents was delicensed

From the above table, we infer that sales have grown at a decent 15% CAGR over the 5 year period despite of the FMCG Sector underperforming from sometime now. The company's operating profit has grown 17% CAGR during the period under review, indicating continuous improvement in profitability. Profit after taxes also saw a decent growth of 13% over the years. Contract manufacturing, which the company undertakes for it's parent's subsidiary - P&G Home Products (who initiated a price war by cutting prices of its detergents) saw an explosion in topline during FY04. Consequently, CAGR for this business took a quantum leap at 31% between FY02 to FY05E. The company licensed the Old Spice trademark and business to a Goa based company for a period of ten years to manufacture, sell, distribute and market the Old Spice products in India, Sri Lanka and Bangladesh in FY02 for which the company receives a fee.

Growth opportunities
While the 'Vicks' brand addresses all segments in the anti-cold segment (Vicks Action 500 tablets, Vaporub, Inhaler and cough drops), 'Whisper' is considered a pioneer in the fast growing Indian feminine care (sanitary napkins) category. Infact, Whisper accounts for over 40% share in the Rs 3 bn sanitary napkin market.

As per estimates, only 20%-25% of urban women in India use sanitary napkins. The ratio is much lesser in other smaller towns and rural regions. Going forward, as living standards improve, the usage of the same is likely to increase, which would be largely beneficial to companies like P&G Hygiene in particular. To grow its Vicks folio, the company has recently entered the liquid dosage form in the anti-cold category – 'Vicks Formula 44'. The liquid form is the largest contributor to the Rs 5.5 bn anti-cold market in India.

Concerns
P&G is largely a two-product company out of which 'Vicks' is mainly a seasonal product since it is used only in winters, sales are volatile. Also, it faces stiff competition from domestic local brands like Amrutanjan, Zandu etc., in rubs and balms, and from MNC brands such as Halls, Strepsils in cough lozenges segment. A recent entrant Paras Products has been giving stiff competition to Vicks Vaporub, by aggressive advertising and competitive pricing of its products.

Kimberly Clarke, a leading global player in the feminine hygiene segment, has launched its product in the Indian market through a joint venture with Hindustan Lever. P&G has traditionally adopted the high quality, premium pricing policy for its products. The Indian market is extremely price sensitive and the company has been witnessing immense pressure from competitively priced products of other players in both its core businesses.

The parent has two other subsidiaries and most of the parent's worldwide product folio like hair care (Head and Shoulders, Pantene) as well as detergents (Ariel and Tide) have been introduced through these two 100% subsidiaries. The PGHH shareholders do not get a share of these businesses apart from the EBIT margin of about 4.7% that it earns for the contract manufacturing that it does for these entities.

What's new?
Globally, P&G has recently acquired Gillette for US$ 57 bn and there may be some minor positive impact, but more negotiating power vis-à-vis global retailers is not going to amount to much. At the same time, the deal creates an enterprise that is unmatched in geographic reach and competitive positioning. Globally, after the acquisition, P&G will become the market leader dethroning Unilever who held the position for a long time.

As far as its Indian operations are concerned, the acquisition is no doubt a big positive for P&G in India. However, investors have to be aware of two factors here. One, P&G, besides the listed company in India, has other 100% subsidiaries in India. Even if the deal goes through, it is unlikely that P&G Hygiene will get access to the Gillette folio. They may at best be marketers or manufacturers of some of the Gillette products.

What to expect?
At the current price of Rs 565, the stock trades at a P/E of 13 times 1HFY05 annualised earnings and market cap. to sales of 3x. Investors need to consider that over 90% of P&G's total PBIT comes from its core business. Though contract manufacturing will continue to spearhead topline momentum, focus should be on the company's core operations of health and hygiene. The positive thing is that its core business performance is encouraging. The company has introduced a new variant of Whisper at a lower price point in southern India. This may increase penetration of the product, thereby aiding volume growth. At the same time profit margins are under tremendous pressure, which are a cause of concern.

We had recommended P&G Hygiene in November 2003 as a BUY with a target price of Rs 630. The stock has breached that earlier. In the coming years, as the unlisted P&G subsidiaries make their presence felt in the detergent space, P&G Hygiene too will benefit from the quantum of contract manufacturing. Also, the poor per capita consumption for its feminine care folio indicates latent growth potential. On the flip side, there are many international brands (imports) available now atleast in the key metros that sometimes work out to be cheaper for consumers. In that sense, the space is getting competitive. In short, though P&G may benefit from an uptick in consumption, its relatively two-product focus and the parent's other 100% subsidiaries put it at a bottom heap of our valuation matrix. In our view, there are better growth stories available in the FMCG space.

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