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P&G: Benefits continue!

May 25, 2007

Performance summary
Procter and Gamble Health and Hygiene (PGHH) announced its results for the third quarter and nine months ended March 2007 (June-ending company). For the nine months period, the topline has declined by 8.8% YoY, but is not comparable as the 9mFY06 numbers include the financials of the detergent business, which was transferred to the parent’s unlisted subsidiary, Procter and Gamble Home Products (PGHP) in 1QFY06. The profits for 9mFY07 (excluding the exceptional item) is has grown by a staid 2.6% YoY.

(Rsm) 3QFY06 3QFY07 Change 9mFY06 9mFY07 Change
Net Sales 1,129 1,229 8.9% 4,539 4,140 -8.8%
Expenditure 861 900 4.5% 3,495 2937 -16.0%
Operating Profit (EBDITA) 268 329 22.9% 1,044 1,203 15.3%
Operating Profit margin (%) 23.7% 26.7%   23.0% 29.1%  
Other Income 112 34 -69.6% 213 108 -49.3%
Interest - -   1 0 -90.9%
Depreciation 16 27 70.4% 58 66 14.2%
Profit before Tax 364 336 -7.7% 1,198 1,245 3.9%
Extraordinary item 0 0   73 0  
Tax 98 122 23.8% 341 366 7.3%
Profit after Tax/(Loss) 265 214 -19.3% 929 878 -5.5%
Net profit margin (%) 23.5% 17.4%   20.5% 21.2%  
No. of Shares (m) 32.5 32.5   32.5 32.5  
Diluted Earnings per share (Rs)*         41.4  
P/E Ratio (x)*         18.3  
*(trailing 12 months)            

What is the company’s business?
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 the segments it is present in, backed by strong brands, namely ‘Vicks’ in the anti-cold segment and ‘Whisper’ in the feminine care segment. The parent has two other 100% subsidiaries in India, which have a dominant shampoo (Pantene, Rejoice) and detergent (Ariel, Tide) portfolio. P&G undertakes contract manufacturing for its parent’s detergent portfolio in India.

In July ‘05, the listed entity, PGHH, sold its detergent manufacturing unit at Mandideep in Madhya Pradesh, to the parent’s unlisted subsidiary in India, Procter and Gamble Home Products (PGHP). PGHH carried out contract manufacturing of detergents for PGHP and earned a margin for the same. It must be noted that 1QFY06 was the last quarter in which PGHH carried out contract manufacturing for its parent’s wholly owned subsidiaries, as the detergents plant was transferred to the unlisted entity effective October 1, 2005.

What has driven performance in 3QFY07?
Feminine segment drives the growth: For 3QFY07, P&G has reported a 9% YoY growth in the topline led by a strong performance of the Feminine Hygiene business, which posted a very strong 20% YoY growth. The contribution of the segment increased from 53% in 3QFY07 to 58% in this quarter. However, the performance of the healthcare business was lower in the quarter. In the nine-month period ended March 31, 2007, sales grew by 15% YoY over the corresponding period last year, if one excludes the sales from the manufacturing business. This growth has been driven by the 22% YoY growth in feminine hygiene sales and the 8% YoY growth in the healthcare segment. The company has also commenced production at the new plant in Baddi. Also, as income levels of women improve, personal hygiene standards will automatically follow suit, resulting in the increased usage of the same, which in turn would be largely beneficial to P&G Hygiene in particular. It must be noted that even in urban areas, penetration of sanitary napkins is only 25% and this figure stands at a mere 8% to 10% in the rural areas.

Cost break-up
As a % of net sales 3QFY06 3QFY07 9mFY06 9mFY07
Total Cost of goods 22.1% 29.0% 35.4% 24.9%
Staff Cost 5.8% 6.4% 5.7% 6.9%
Advertising 11.8% 11.4% 9.2% 11.5%
Other Expenditure 36.6% 26.4% 26.8% 27.6%

Robust margins: Operating margins for both the periods under review have expanded largely due to the divestment of the contract manufacturing business, which yielded very low margins, as compared to the company’s core portfolio. During the quarter, though the cost of goods has increased as percentage of sales, the reduction in the advertising and other expenditure contributed to the 300 basis points (3%) increase in the margins. For 9mFY07, the improvement in operating margins was higher (by 6.1%).

Bottomline view: Despite higher margins, the bottomline for 3QFY07 fell by 19% YoY due to lower other income and higher depreciation charges. The depreciation charges increased as the company’s new plant in Baddi commenced operations. For 9mFY07, while the bottomline fell by 6% YoY, if one were to exclude the extraordinary item, the net profits have still grown by a staid 2.6% YoY.

What to expect?
At the current price of Rs 760, the stock trades at a price-to-earnings multiple of 18.4 times its trailing 12-month earnings. Capitalizing on the opportunity existing in the hygiene segment, PGHH is likely to benefit from the same going forward. It is now a focused two-product company, with both these brands in the lifestyle segment. The move to divest the low margin segment of contract manufacturing has also paid off and will contribute to the margin expansion. However, increasing competition will continue to remain a cause for concern.

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