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P&G: Robust sales but margins contract - Views on News from Equitymaster
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P&G: Robust sales but margins contract
Jun 5, 2012

Procter & Gamble Hygiene and Health Care Ltd. has announced its third quarter results for 2011-2012 (3QFY12) (June ending company). The company has reported a 39% YoY growth in sales and a 33.7% YoY increase in net profits. Here is our analysis of the results.

Performance summary
  • Procter & Gamble Hygiene and Health Care (PGHH) posted a 39% jump in revenues led by over 37% growth in the healthcare category and above 30% growth in feminine hygiene sales. For 9mFY12, topline grew by 30%.
  • However, a steep 52% escalation in cost of goods sold continued to constrict profitability. The company's operating (EBITDA) margin slid by more than 200 basis points in both 3QFY12 as well as 9mFY12.
  • On the back of a 118% jump in other income, PGHH's net profit grew by 33.7% in 3QFY12. For 9mFY12, earnings grew by 26.7% aided by 65% rise in other income and 4.2% drop in tax outgo.

Standalone financial snapshot
Rs(m) 3QFY11 3QFY12 Change 9mFY11 9mFY12 Change
Income 2,349 3,269 39.1% 7574 9843.2 30.0%
Expenditure 1,885 2,697 43.1% 6184.8 8277 33.8%
Operating profit (EBDITA) 465 571 23.0% 1,389 1,566 12.7%
EBDITA margin (%) 19.8% 17.5%   18.3% 15.9%  
Other income 82 180 118.0% 243.6 402.2 65.1%
Interest - 0.1   0.1 0.1  
Depreciation 57 71 24.3% 159.5 201 26.0%
Profit before tax 490 680 38.8% 1,473 1,767 20.0%
Extraordinary inc/(exp) - -   - -  
Tax 100 159 58.9% 320.7 307.1 -4.2%
Profit after tax/(loss) 389 521 33.7% 1,153 1,460 26.7%
Net profit margin (%) 16.6% 15.9%   15.2% 14.8%  
No. of shares (m)         32  
Diluted earnings per share (Rs)*         56  
Price to earnings ratio (x)*         40.5  
(*On a trailing 12-month basis)

What has driven performance in 3QFY12?
  • Backed by over 30% growth in sales of feminine hygiene and healthcare products, PGHH recorded a 39% jump in revenues. In feminine hygiene, meaningful consumer initiatives enabled the company to expand consumer base and translate into category growth. The healthcare category growth was driven by commercial and product innovations during the quarter.

  • Despite brisk growth in turnover, higher raw material costs continued to pinch the company's profitability. Raw material costs as a proportion of sales increased by 346 basis points during the quarter. The impact was partially neutralized by fall in staff costs and other expense (as a proportion of sales). PGHH's operating margin contracted by 230 basis points during the quarter.

  • At the net level, a 2.2 folds rise in other income earned saw PGHH's profitability decline by a mere 70 basis points for the quarter. The company's tax incidence increased to 23.4% from 20.5% in the year-ago quarter.
    Operating cost break up
    As a % of net sales 3QFY11 3QFY12 Change in basis points
    Total Cost of goods 36.5% 39.9% 346.0
    Staff Cost 5.9% 5.3% -63.2
    Advertising 16.2% 16.1% -6.6
    Other Expenditure 21.7% 21.2% -46.9

What to expect?
PGHH has been witnessing robust topline growth. However the company's profitability has been under pressure due to commodity inflation. In the Union Budget 2012-13, the excise duty on feminine hygiene products has been raised by a percentage point to 6%. This will have a marginal impact as most of PGHH's manufacturing plants are located in excise-free zones. The company's product kitty is restricted to only two brands. However, under-penetration in feminine hygiene category and strong brand equity of the Vicks brand is expected to keep the company on a robust growth trajectory.

At a price of Rs. 2265, the stock is trading at 26 times our estimated FY14 earnings. However, current valuations do not justify the company's potential and we would advise investors to exercise caution.

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