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P&G – Can it sustain growth?

Aug 16, 2000

Procter & Gamble Hygiene and Healthcare Ltd. (PGHH) is one of those FMCG companies, which although has only premium brands, has been successful in generating topline growth through price increases. The company’s brands ‘Whisper’ and ‘Vicks’ are leaders among their respective categories. In the past five years the company has grown its revenues at a CAGR of 10% while profits have grown at a faster rate of 25%. Further the company’s ad spend ratio of 7.8%, for the year ended June 1999, has actually declined from a level of 10.1% in June 1998.

This is comparable among its peers in the industry. It has the highest profit margins among its peers in the FMCG industry. The premium margins are due to its value added products. The company has continuously improved its margins in the past five years from 14.6% in FY96 to 21.5% now. However, the interesting fact is that it has one of the lowest valuations within the FMCG sector.

Comparative profit margins
Particulars PGHH HLL Britannia SBCH Cadbury Nestle
OPM(excl. other income) 21.5% 12.0% 7.5% 18.4% 14.6% 15.2%
NPM 13.7% 10.2% 4.5% 13.2% 7.1% 6.9%
Advt. as a % to sales 7.8% 7.1% 6.6% 5.4% 10.2% 6.5%

The main factor, which seems to have held back the company’s valuations is the presence of the parent’s wholly owned subsidiary Procter & Gamble Home Products Ltd. (PGHP) It has been observed that the parent is introducing new products through PGHP. As a result, the stock’s P/E, which has been in the range of 35-40 times historically, has come off considerably. In the future the company is likely to face stiff competition from the international players and low priced products. The re-rating in the stock would depend on the company’s ability to maintain its financial performance keeping pace with the latest technology adoption.

Comparative valuations
  PGHH HLL Britannia SBCH Cadbury Nestle
Year Ended June 30 Dec 31 March 31 Dec 31 Dec 31 Dec 31
Market Price (Rs) 657.8 236.3 699.0 444.0 587.3 465.1
Market Cap. to Sales (x) 2.9 5.1 1.6 2.8 4.1 2.9
Price / Earnings Ratio (x) 20.1 48.5 36.0 20.6 53.3 41.9

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