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P&G: Annual report extracts - Views on News from Equitymaster
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P&G: Annual report extracts
Oct 5, 2010

Procter & Gamble Hygiene and Health Care Limited (PGHH) is a 69% subsidiary of the FMCG major, P&G USA. The two-product company, is dominating both segments backed by strong brands, namely 'Vicks' in the anti-cold segment and 'Whisper' in feminine care segment. PGHH's Whisper leads the premium segment with over 50% value market share in urban India.

The company had a robust top line performance in FY10. PGHH's sales grew by 16.8% YoY. However, the company's operating (EBITDA) margins fell by 1.5% to 25.3%. This came on the back of increase in raw material costs and higher advertisement spending. The company's bottom line as a result of this and higher effective tax rate grew by only 1.3% YoY.

 

Sales of the company grew on the back of strong growth in the Feminine Hygiene segment. The segment posted growth of 24% YoY which was the highest growth for P&G across the globe. This growth was aided by improved penetration and the investment by the company in educating the consumers. Healthcare business supported the company's growth with a 11% YoY increase in sales. Vicks Vaporub increased its market share to the highest ever level while Vicks cough drops grew by 15% YoY on the back of the launch of jumbo drops.

The company during FY10 maintained its dividend per share at Rs 22.5. However, the dividend payout ratio fell by 0.8% to 40.6%. On the other hand, the dividend yield of the company fell sharply from 2.5% to 1.1% as the company's stock price moved up significantly during the year.

The company's ROE fell sharply by 6.7% to stand at 33.6% for FY10. This is due to a lower operating efficiency ratio as the company's profit margins were lower as a result of higher operating costs and increase in effective tax rates.

Current ratio for the company fell from 2.4 times to 2.2 times during the year. This is due to an increase in current liabilites as a result of creditor days increasing sharply from 55 days in FY09 to 80 days in FY10. This is good news for the company as it shows that it is able to manage its working capital better.

PGHH invested Rs 211 m in capex over the year. But the return on sales was higher than the investment in gross fixed assets. This is evident from the graph as gross assets to sales fell from 29% to 27% during the fiscal. This shows that PGHH is utilizing its fixed assets more efficiently to generate sales.

What we expect?
At a price of Rs. 2,207, the stock is trading at 27.2 times our estimated FY13 earnings. (RPro subscribers click here). The company is the market leader in both the segments it operates in. We believe that PGHH has good growth potential because of its presence in the feminine hygiene market which remains under penetrated. However, the price of the stock has run up sharply. This is evident from the sharp fall in dividend yield and the forward PE chart below. The company is trading close to its most expensive levels in the last decade on a forward PE basis. For this reason, we would advise investors to exercise caution.

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