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Subsidiary concerns cloud valuations...

Jun 2, 2001

A large part of the Indian fast moving consumer goods (FMCG) landscape is filled with companies vying for a plethora of product categories. Expanding product portfolios is an inherent strategy of the FMCG companies in India and all over the world. The aim has always been garner a great share of the consumer pie.

But in this entire milieu of brands, one company decided to take a different route. The company is Procter and Gamble Hygiene and Healthcare (PGHH), a 65 percent subsidiary of the US$ 38 billion FMCG major Procter & Gamble, USA. The Indian subsidiary despite being a focused two-product company has been successful in generating topline growth through price increases. It is the market leader in the anti-cold healthcare (Vicks) segment and feminine care (Whisper sanitary napkins). While the companys revenues grew at a compounded annual growth rate of 10 percent in the past 5 years, profits showed an encouraging growth rate of 25 percent. PGHH being the least cost producer of Vicks Vaporub among P&G facilities worldwide is also the sourcing base for all P&G subsidiaries in Asia.

The company realised early on that it could not match the distribution strengths which compatriot Hindustan Lever (HLL) possessed. Therefore the company truncated its distribution network and signed a distribution agreement with Marico for Clearasil, Old Spice, Camay range of soaps and Ariel detergent bar. To lend focus to its business, PGHH consciously decided to be present only in two products viz. Anti-cold (Vicks) and feminine care (Whisper). Thus it exited from the shampoo segment by selling Mediker (anti-lice shampoo) to Marico Industries for Rs 100 million (US$ 2 million) in 1999. PGHH also terminated its manufacturing agreement for shampoos with P&G Home Products, its parents' 100 percent subsidiary.

Margin advantage
OPM (%) NPM (%)
P&G 26.8 18.4
HLL 12.9 11.5
Colgate 7.5 4.9
Gillette 9.2 4.5
Reckitt 6.2 3.6
* OPM = Operating profit margin
* NPM = Net profit margin

However, the going is not all that smooth. PGHH's strategy has revolved around premium positioning of both its product categories. In a sense, the company has been focusing on margins (value) rather than volumes. But PGHHs topline growth in the last two years slowed down to a single digit due to stiff competition in the markets from low priced packs. The unorganised sector also gave a tough time to the company. Apart from the competition, the slowing market growth has also worried investors. The anti-cold healthcare segment registered a marginal 1.5 percent overall sales growth in 2000, with Vicks maintaining a 40 percent hold on this segment. But in sanitary napkins segment, Whisper continues to be the market leader with a 50 percent share despite the onslaught of cheaper products from competitors like Johnson and Johnson and HLL. Sales in this segment registered a 2 percent growth during fiscal year 2000.

Its strategy of focusing on premium segment of the market has however, led to a continuous improvement in its operating margins (26.8 percent in nine month period ended March 2001), which are among the highest in the FMCG industry.

Given PGHHs clear strategy on focusing on two products, as also its premium positioning, the company is better placed than most FMCG companies to clock double-digit growth figures both in its topline and bottomline in the medium term. In the long term however, PGHH's two-product focus might become a bane as competition picks up. To keep competition at bay, the company will have to keep increasing its ad spends, which in the long term may strain its profitability. In 1999, PGHHs advertisement expenditure as a percentage of turnover was 6.7 percent. In 2000, it increased to 9 percent. This has put pressure on the companys margins. There are also concerns regarding its parent's two 100 percent subsidiaries in India.

Due to the above reasons PGHH has been accorded lower valuations compared to its peers in the industry. Its market cap to sales ratio of 2.5 times is however, in line with other companies.

However, there is a silver lining for this company. PGHHs US based parent has identified India among the top three markets in the world in the healthcare segment. This will help PGHH get more research and an expanded product line in the healthcare segment from its parent and hopefully would also help de-risk its business.

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