P&G: Worrying signs

P&G Hygiene & Healthcare Limited's (P&G) third quarter performance reflects the difficult market conditions the FMCG sector has been facing. The company declared a 9% topline growth in the December quarter, but finished the March quarter with a significant 11% decline in topline growth.

(Rs m)	3QFY01	3QFY02	Change	9m FY01	9m FY02	Change
Net Sales	908	805	-11.3%	3,240	3,205	-1.1%
Other Income	39	19	-50.9%	64	73	14.2%
Expenditure	612	626	2.4%	2,284	2,361	3.4%
Operating Profit (EBDIT)	296	179	-39.7%	956	843	-11.8%
Operating Profit Margin (%)	32.6%	22.2%		29.5%	26.3%
Interest	0	0		1	0
Depreciation	70	37	-47.2%	213	158	-25.6%
Profit before Tax	266	161	-39.4%	806	758	-6.0%
Extraordinary items	0	0		0	73
Tax	57	40	-29.8%	91	168	83.7%
Profit after Tax/(Loss)	208	121	-42.0%	715	663	-7.3%
Net profit margin (%)	22.9%	15.0%		22.1%	20.7%
No. of Shares (eoy) (m)	21.6	21.6		21.6	21.6
Earnings per share*	38.5	22.3		44.1	40.9
Current P/e ratio		20.8			11.4
*(annualised)

The company finished the quarter with a 42% decline in profits to Rs 121 m. However, the company's release says that P&G had earned an extraordinary income of Rs 100.5 m in March quarter last year, and therefore, has actually registered a 12% growth in net profit YoY. This extraordinary income must have arisen due to sales adjustments in the March quarter last year.

However, in March quarter last year the company did not elaborate on how these extraordinary gains came about. The management of P&G seems to be giving this aspect prominence now. How this extraordinary item affected the March quarter numbers in the previous year is therefore not clear to us, so we are keeping our last year's March quarter figures intact.

Apart from the decline in topline, another worrying aspect is a huge 10% drop in operating margins to 22%. This is another sign of the difficult market conditions P&G is facing. On a nine month basis, the performance is somewhat better. The company has logged in a marginal 1% decline in sales and a 7% drop in net profits. If we take out the extraordinary income P&G earned in FY02 (till date) then the company actually saw profits decline by 17% during the nine month period. In 9mFY02 too, the pressure on margins is evident.

Commenting on the performance Mr. Bharat Patel, Chairman, P&G said "Our third quarter sales are down because of continuing slowdown in economy resulting in decline in most established packaged consumer goods category. We have strong plans for the remaining part of the fiscal and next year so that sales decline turns into significant sales increase"

At the current price of Rs 465 the stock trades at a P/E of 11x 9mFY02 annualised earnings. Given the company's focus on operational efficiencies, the valuation is on the lower side. This is probably because of the company's two product dependence as well as concerns regarding the parent's 100% subsidiaries. Also, the company's 3QFY02 performance is sending warning signals about the pressure on the company's core business.