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P&G: Controlled costs, other income boost profits

Oct 18, 2011

Procter & Gamble Hygiene and Health Care Ltd. has announced its fourth quarter results for 2010-2011 (4QFY11) (June ending company). The company has reported a 23.6% YoY growth in sales and a 253% YoY jump in net profits. Here is our analysis of the results.

Performance summary
  • Sales grew by 23.6% YoY during 4QFY11. The excise duty on female hygiene products was slashed from 10% to 5% in the Union budget 2011-12. This aided the sales growth. However as excise outgo was high in the remaining three quarters, annual sales in FY11 grew by a muted 10.8%.
  • Operating (EBITDA) margins for the company remained flat at 10%. The steep rise in cost of goods sold and staff expenses offset the robust rise in sales during the quarter. However for FY11, operating profitability contracted sharply to 16.2% from 25.4% in the previous year.
  • Net profit for the quarter surged by 253% YoY on the back of a 10.5 folds jump in other income, net tax credit of Rs 62 m and lower depreciation outgo. The bottomline for the year fell by 16% due to lower operating income.

Consolidated financial snapshot (IFRS)
Rs(m) 4QFY10 4QFY11 Change FY10 FY11 Change
Income 1,982 2,451 23.6% 9,045 10,019 10.8%
Expenditure 1,786 2,209 23.7% 6,744 8,394 24.5%
Operating profit (EBDITA) 197 242 23.0% 2,300 1,626 -29.3%
EBDITA margin (%) 9.9% 9.9%   25.4% 16.2%  
Other income 11 115 951.4% 287 364 27.0%
Interest 0 0   0 0  
Depreciation 100 62 -37.9% 250 222 -11.5%
Profit before tax 108 294 173.7% 2,336 1,767 -24.3%
Extraordinary inc/(exp) - -   - -  
Tax 7 -62 -1040.9% 539 259 -52.0%
Profit after tax/(loss) 101 356 253.1% 1,798 1,509 -16.1%
Net profit margin (%) 5.1% 14.5%   19.9% 15.1%  
No. of shares (m)         32  
Diluted earnings per share (Rs)*         63.3  
Price to earnings ratio (x)*         30.5  
*On a trailing 12 months basis

What has driven performance in 4QFY11?
  • Sales of Procter & Gamble Hygiene and Health Care Limited (PGHH) grew by a robust 23.6% YoY during the quarter led by a rise of around 29% in offtake. The excise duty on feminine hygiene products and baby diapers was rolled back from 10% to 5% in the Union Budget 2011-12. Higher revenue contribution was offset by the price cuts announced by the company to pass on the benefit. The company reduced selling price on its Whisper and Pampers products in the range of 3-15% across specific SKUs during the quarter.
  • PGHH has been able to maintain its operating margin at around 10%. Despite steep jumps of 126% and 114% in raw material and staff costs respectively, the company was able to rein in overall expense by cutting down advertisement and other expenditure during the quarter. As a proportion of sales, cost of goods sold increased by 12.5 percentage points, whereas advertisement and other expenses fell by over 7 percentage points each.
  • Net profit for the quarter surged by 253% YoY riding on a 10.5 folds jump in other income and a net tax credit of Rs 62 m earned. A 38% decline in depreciation outgo further added to the bottomline of the company during the quarter.

Cost break-up
As a % of net sales 4QFY10 4QFY11 FY10 FY11
Total Cost of goods 29.6% 42.1% 30.9% 38.9%
Staff Cost 3.3% 5.6% 4.8% 5.0%
Advertising 25.6% 18.5% 17.9% 18.4%
Other Expenditure 31.6% 23.9% 21.0% 20.4%

What to expect?

At a price of Rs. 1,930, the stock is trading at 21 times our estimated FY13 earnings. The excise duty benefit has restored PGHHs profitability that had been falling in the previous four quarters, shielding it from the runaway inflation. 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, even at current valuations, the stock appears overpriced and we would advise investors to exercise caution.

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