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P&G: Margin sacrifice led growth

Apr 25, 2003

After a staid first half of FY03, P&G Hygiene & Healthcare Limited (P&G) has finally shown signs of strength in its March quarter numbers. The company has reported a strong 17% topline growth during this quarter. The company has compromised its operating margins (albeit marginally) to propel topline growth.

(Rs m)3QFY023QFY03Change9m FY029m FY03Change
Net Sales 81695617.1%3,2323,3864.8%
Other Income193690.0%14289-37.4%
Expenditure63775518.6%2,3892,4703.4%
Operating Profit (EBDIT)17920012.0%8439168.6%
Operating Profit Margin (%)21.9%21.0% 26.1%27.0% 
Interest 00-01-
Depreciation3725-31.9%15887-44.8%
Profit before Tax16121131.1%82691610.9%
Extraordinary items0-3-4-16-
Tax406049.0%20823714.0%
Profit after Tax/(Loss)12114822.4%6236636.5%
Net profit margin (%)14.8%15.5% 19.3%19.6% 
No. of Shares (eoy) (m)21.621.6 21.621.6 
Earnings per share*22.327.3 38.440.9 
Current P/e ratio 13.7  9.2 
*(annualised)      

Aided by almost no interest burden and lower depreciation provisioning (down 32%), the company has managed to report over 22% bottomline growth, despite a 49% growth in tax provisioning. Depreciation provisioning has gone down as the company sold its Hyderabad factory assets to a contract manufacturer in January 2003.

On a nine month basis, P&G has reported a 5% topline growth and a staid 7% bottomline growth. The significant dip in operating margins becomes apparent if one compares it against the 9mFY03 numbers (where OPM stood at 27%). It indicates that P&G has been forced to cut pricing of its products in a bid to sell more. And this seems to have worked for the company this quarter.

as a % of sales3QFY023QFY039m FY029m FY03
Increase/(decrease) in stock in trade-6.7%-2.9%0.7%1.9%
Raw material/packaging cost30.6%29.2%29.2%29.0%
Raw material cost11.9%10.8%7.5%7.4%
Staff cost8.6%9.9%7.3%8.1%
Other expenses33.8%32.2%29.2%26.5%
Total expenditure78.1%79.0%73.9%73.0%

Sales of P&G's core categories, i.e., Health Care (Vicks) and Feminine Hygiene (Whisper) grew by 25% during the quarter, as compared to an overall 8% growth in 9mFY03. In 9mFY03 so far, Vicks has grown by 5% and Whisper business by 13%. The growth in Whisper has largely been spearheaded by Whisper Ultra.

The company has recorded a significant growth in other income (90%) and this has propelled the bottomline in 3QFY03. We believe that P&G's sell off of its Hyderabad factory, for which P&G Singapore reimbursed the company, seems to have increased cash in the company, leading to higher other income. In the nine months comparision, other income for last year includes around Rs 73 m as extraordinary income, and therefore the dip in other income during 9mFY03.

At the current price of Rs 375 the stock trades at a P/E of 9.2x 9mFY03 annualised earnings. The valuation is on the lower side of the FMCG spectrum. This is probably because of the company's two product focus, as well as concerns regarding the parent's other 100% subsidiaries.

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