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P&G: Profitability continues to slide - Views on News from Equitymaster

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P&G: Profitability continues to slide
Jun 20, 2013

Procter & Gamble Hygiene and Health Care Ltd. has announced its third quarter results for 2011-2012 (3QFY13) (June ending company). The company has reported a 28% YoY growth in sales and flat in net profits. Here is our analysis of the results.

Performance summary
  • Topline grew by 28% YoY led by a 39% YoY growth in the feminine care segment. During 9mFY13, revenues were up by 28%.
  • Operating margin fell by 2.6% YoY due to a steep rise in raw material costs. For 9mFY13, higher other expense and input costs pulled down operating margins by 1.9% YoY.
  • Net profit remained flat on higher tax outgo and fall in other income. During 9mFY13, net profits were up by a mere 3% YoY.

Financial Snapshot
Rs(m) 3QFY12 3QFY13 Change 9mFY12 9mFY13 Change
Income 3,269 4,173 27.7% 9843.2 12637 28.4%
Expenditure 2,671 3,518 31.7% 8277 10861.2 31.2%
Operating profit (EBDITA) 598 655 9.4% 1,566 1,776 13.4%
EBDITA margin (%) 18.3% 15.7% 2.6% 15.9% 14.1% 1.9%
Other income 153 152 -0.7% 402.2 534.7 32.9%
Interest 0 0   0 0  
Depreciation 71 76 6.6% 201 221.1 10.0%
Profit before tax 680 730 7.4% 1,767 2,089 18.2%
Tax 159 210 31.7% 307.1 575.9 87.5%
Profit after tax/(loss) 521 521 0.0% 1,460 1,514 3.6%
Net profit margin (%) 15.9% 12.5%   14.8% 12.0% 2.9%
No. of shares (m)         32  
Diluted earnings per share (Rs)*         57.5  
Price to earnings ratio (x)*         51.2  
(* On a trailing 12 months basis)

What has driven performance in 3QFY13?
  • The company recorded a 28% YoY increase in topline led by 39% YoY growth in the feminine care segment. Sales in the segment were driven by consumer innovations with the company's market share reaching an all-time high of 57%. The personal health care segment registered flat growth. The company re-launched the 'Old Spice' brand and recorded sales of Rs 150 m in its first month after takeover.

  • Despite the robust rise in turnover, operating profitability has fallen due to a steep jump in raw material costs and wages. As a proportion of sales, these expenses were up by 2.8% YoY and 1% YoY, respectively. The impact was marginally offset by controlled ad-spends and other expenses that fell by 0.4% YoY and 1.2% YoY, respectively (both as a proportion of sales).

  • Net profits remained stagnant due a steep 32% YoY surge in tax outgo. The tax incidence increased to 29% from 23% in the year-ago quarter. Even the other income earned was lower by 0.7% YoY for the quarter.

    Cost break-up
    As a % of net sales 3QFY12 3QFY13 Change in basis points
    Total Cost of goods 39.9% 42.7% 2.8%
    Staff Cost 5.3% 6.3% 1.0%
    Advertising 16.1% 15.7% -0.4%
    Royalty Expense 4.2% 4.6% 0.4%
    Other Expenditure 16.1% 14.9% -1.2%

What to expect?
P&G has not been able to fully translate its robust topline growth into higher earnings. Since the start of the FY13, the company's margins have eroded on account of steep jump in other expenses mainly due to higher distribution costs and forex losses. At a price of Rs. 2946, the stock is trading at 51 times its trailing twelve month earnings. In the absence of any growth drivers, the stock appears overpriced at current valuations. As such we reiterate a SELL on the stock.

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