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P&G: Strong core performance - Views on News from Equitymaster
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P&G: Strong core performance
Aug 28, 2007

Performance summary
  • The core portfolio grows by 14% YoY. This growth is driven by the 24% YoY growth in Feminine Hygiene sales and the 5% YoY growth in Healthcare business.

  • For the full year the operating margins improves by 300 basis points (3%).

  • The tax rate increases from 29% in FY06 to 38% in FY07.

  • The Board of Directors has recommended 200% dividend, i.e. Rs. 20 per equity share (dividend yield of 2.7%).

(Rs m) 4QFY06 4QFY07 Change FY06 FY07 Change
Net Sales 1,129 1,264 11.9% 5,667 5,404 -4.6%
Expenditure 875 1066 21.8% 4,370 4,003 -8.4%
Operating Profit (EBDITA) 254 198 -22.1% 1,298 1,401 8.0%
Operating Profit margin (%) 22.5% 15.7%   22.9% 25.9%  
Other Income 430 36 -91.7% 643 144 -77.6%
Interest - -   1.1 -0.1 -109.1%
Depreciation 21.7 24 11.5% 79.2 89.8 13.4%
Profit before Tax 662 210 -68.3% 1,860 1,455 -21.8%
Tax 197 84 -57.4% 538 557 3.5%
Exceptional items - -   73 0 -100.0%
Profit after Tax/(Loss) 466 126 -72.9% 1,395 898 -35.6%
Net profit margin (%) 41.2% 10.0%   24.6% 16.6%  
No. of Shares (m) 32.5 32.5   32.5 32.5  
Diluted Earnings per share (Rs)*         27.6  
P/E Ratio (x)*         27.2  
*(trailing 12 months)

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

In July ‘05, the listed entity, PGHH, sold its detergent manufacturing unit at Mandideep in Madhya Pradesh, to the parent’s unlisted subsidiary in India, Procter and Gamble Home Products (PGHP). PGHH carried out contract manufacturing of detergents for PGHP and earned a margin for the same. It must be noted that 1QFY06 was the last quarter in which PGHH carried out contract manufacturing for its parent’s wholly owned subsidiaries, as the detergents plant was transferred to the unlisted entity effective October 1, 2005.

What has driven performance in FY07?
Feminine driven: P&G’s full year results are not comparable as it includes the divestment of the detergent contract manufacturing business and hence the sales have degrown by 5% YoY. Excluding that the topline has grown by 14% YoY. This growth was driven by the 24% YoY growth in Feminine Hygiene sales and the 5% YoY growth in the Healthcare business. Higher growth in Whisper variants led to the increased market share (value terms) of the Whisper brand. The company is also expanding the capacity of its Feminine Hygiene plant in Goa and its Health Care plant in Baddi, Himachal Pradesh. It also has increased it’s advertising spend to target more customers.

Strong margins: For 4QFY07, the operating margins have witnessed a fall of 6.8% YoY. This was mainly due to higher raw material and labour costs. However for the full year, margins have improved by 300 basis points (3%). This was mainly due to the divestment of its detergent manufacturing facility. Contract manufacturing of detergents yielded very low margins, as compared to the company’s core portfolio and hence the divestment of the same has led to the improvement in margins. Other than the lower staff costs and raw material costs (the latter fell to 26.4% in FY07 as compared to 32.7% in FY06), all other expenses have increased (as percentage of sales), which restricted the margin expansion to that extent. The company’s new advertising and marketing programs and robust trade plans led to higher advertising expenses.

%of net sales 4QFY06 4QFY07 FY06 FY07
Consumption of raw and packaging materials 30.6% 34.8% 32.7% 26.4%
Purchase of trading material -0.9% 1.1% 1.6% 1.1%
Staff costs 7.2% 7.8% 6.0% 5.4%
Advertising expenses 9.2% 8.1% 9.2% 10.7%
Royalty expenses 5.2% 5.0% 4.3% 5.0%
Others 26.1% 27.5% 23.4% 25.4%

Net profits: Despite higher operating margins for FY07, the net profits fell by 36% YoY. Excluding the extraordinary item, the bottomline declined by 32% YoY. The tax rate increased from 29% in FY06 to 38% in FY07. However, last year’s profit is not comparable as it included higher other income on account of write-back of liabilities no longer required.

What to expect?
At the current price of Rs 751, the stock is trading at a price-to-earnings multiple of 27.2 times its trailing 12-month earnings. With changing lifestyle and higher incomes of the women population, PGHH is expected to benefit from an increase in revenues from the feminine hygiene segment going forward. It is also investing in the brands and increasing its capacities to meet the demand. Even the margins have increased due to the divestment of its contract manufacturing business. However, concentration of revenues to just two products and stretched valuations from a medium term perspective makes the company a risky proposition.

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