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P&G: Anti-cold is hot!

Aug 26, 2004

Introduction to results
P&G Hygiene and Healthcare (P&G) finished FY04 (June ending) with a significant 31% topline growth. A marginal improvement in operating margins and decline in interest burden helped the company clock over 35% bottomline growth during the year. The company had declared a 1:2 bonus issue during the year.

(Rs m) 4QFY03 4QFY04 Change FY03 FY04 Change
Net sales and licence fees 949 1,436 51.4% 4,424 5,772 30.5%
Other income 43 60 39.5% 148 150 1.5%
Expenditure 971 1,300 33.9% 3,509 4,519 28.8%
Operating profit (EBDIT) -22 136 - 915 1,254 37.1%
Operating profit margin (%) -2.3% 9.5%   20.7% 21.7%  
Interest 5 0 - 6 4 -27.3%
Depreciation 43 40 -8.6% 131 128 -1.8%
Profit before tax -27 157 - 926 1,272 37.3%
Tax -11 30 - 246 350 42.2%
Profit after tax/(loss) -16 127 - 680 922 35.5%
Net profit margin (%) -1.7% 8.8%   15.4% 16.0%  
No. of shares (m) 21.6 32.5   21.6 32.5  
Diluted earnings per share (Rs)* -2.0 15.6   21.0 28.4  
P/E ratio (x)         16.3  
*(annualised)            

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 segments backed by strong brands, namely ‘Vicks' in the anti-cold segment and ‘Whisper' in feminine care segment. The parent has two other 100% subsidiaries in India which have a dominant shampoo and detergent portfolio. P&G ndertakes contract manufacturing for its parent's detergent portfolio (Ariel, Tide) in India.

All around performance
Core business perks up: The company's key businesses, anti cold (Vicks range) and feminine care (Whisper) performed well during the year. While the Vicks health care folio grew by a strong 26%, feminine care was up 15% YoY. Overall, this business grew by 18% YoY. The Vicks folio's growth seems to have been spear headed by its new launch, Vicks Formula 44 cough syrup. Also, focused advertising and improvement in the distribution chain helped the company. Consequently, the PBIT margins of the business too, improved to nearly 29% (up from 26% levels in FY03).

Health & Hygiene mix
(Rs m) FY03 FY04 Change
Vicks health care folio 1,600 2,019 26.2%
% of total revenues 36.2% 35.0%  
Whisper feminine hygiene folio 1,420 1,636 15.2%
% of total revenues 32.1% 28.3%  
Total health & hygiene revenues 3,020 3,655 21.0%
% of total revenues 68.3% 63.3%  

Detergent shine: The key growth driver for the company's topline was no doubt the detergent contract manufacturing business. This division saw a significant 61% growth in revenues. The parent's strategy to garner a bigger chunk of the Indian detergent market by slashing product prices to almost half, has done wonders for this division. It is safe to conclude from the numbers available that the parent has seen a surge in offtake as a result of these price cuts. P&G too has benefited in terms of higher volume of contract manufacturing. Consequently, the division's contribution to overall revenues has gone up from 29% in FY03 to nearly 36% in FY04. PBIT margins of this business too, improved marginally at 5.1%.

Segment snapshot
(Rs m) 4QFY03 4QFY04 Change FY03 FY04 Change
Health and hygiene products 645 816 26.5% 3,154 3,723 18.0%
% of revenues 68.0% 56.8%   71.3% 64.5%  
PBIT margin (%) 7.8% 12.4%   26.4% 28.8%  
Contract manufacturing 304 620 104.2% 1,270 2,050 61.4%
% of revenues 32.0% 43.2%   28.7% 35.5%  
PBIT margin (%) -2.1% 1.4%   4.7% 5.1%  
Total segment revenue 949 1,436 51.4% 4,424 5,772 30.5%
Total PBIT margin (%) 4.6% 7.6%   20.2% 20.4%  

Expense details: The focus on improving efficiencies, as well as the restructuring of employees has helped the company cut costs as a percentage of sales. In 4QFY04, raw material and packaging costs have seen a significant surge. This seems a result of higher volume of contract manufacturing.

Cost break-up
as a % to sales 4QFY03 4QFY04 FY03 FY04
Consumption of raw and packaging material 27.9% 54.0% 32.7% 40.0%
Purchase of trading material 12.3% 0.5% 8.3% 5.8%
Staff cost 9.7% 6.0% 8.3% 6.4%
Other expenditure 52.4% 30.0% 30.1% 26.0%
Total expenditure 102.3% 90.5% 79.3% 78.3%

Over the last five quarters The company has really seen topline momentum coming in from the March quarter. This was the period when the parent declared a price war in the detergent segment. Operating margins have remained inconsistent during the past five quarters and have shown signs of pressure, ever since the contract manufacturing business has picked up. The reason being that the margins of this business are very meager at around 5%, as compared to nearly 29% in its health and hygiene business. With detergent prices still ruling low, we believe that contract manufacturing fillip will continue. But that could have a bearing on the margins.

  4QFY03 1QFY04 2QFY04 3QFY04 4QFY04
Sales growth (YoY) 10.3% 20.6% 18.3% 40.5% 51.4%
OPM (%) -2.3% 23.8% 31.9% 20.3% 9.5%
Net profit growth (YoY) N C* 13.0% 11.2% 22.7% N C*
*Not comparable

Our view
At the current price of Rs 464, the stock trades at 16.3 times FY04 earnings and market cap. to sales of 2.6x. Investors need to consider that 91% of P&G's total PBIT comes from its core business. Though contract manufacturing will continue to spearhead topline momentum, focus should be on the company's core operations of health and hygiene. The positive thing is that its core business continues to perform well. The company has introduced a new variant of Whisper at a lower price point in southern India. This may increase penetration of the product, thereby aiding volume growth.

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