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P&G: Price cuts affects performance
Oct 26, 2010

Procter & Gamble Hygiene and Health Care Ltd. has announced its 1QFY11 results. The company has reported a 1.1% YoY growth in sales and a 39.1% YoY fall in net profits. Here is our analysis of the results.

Performance summary
  • Topline grew by 1% YoY during the quarter. This lackluster performance comes on the back of price cuts and increase in excise duty.
  • Operating (EBITDA) margins for the company fell by 15% to stand at 15.8%. This fall in operating margins was due to sharp increase under all heads of operating costs (as a percentage of sales) during the quarter.
  • Net profit for the quarter fell by 39% on the back of lower operating income, partially offset by higher other income, and lower depreciation as well as lower effective tax rate.

Rs(m) 1QFY10 1QFY11 Change
Net sales 2,258 2,282 1.1%
Expenditure 1,561 1,921 23.0%
Operating profit (EBDITA)  697  361 -48.1%
EBDITA margin (%) 30.8% 15.8%
Other income     51     86 70.9%
Interest -   -    
Depreciation     60     48 -19.7%
Profit before tax  687  400 -41.9%
Extraordinary inc/(exp) -   -    
Tax  172     86 -50.1%
Profit after tax/(loss)  515  314 -39.1%
Net profit margin (%) 22.8% 13.7%  
No. of shares (m)     32     32  
Diluted earnings per share (Rs)*   49.2  
Price to earnings ratio (x)*   41.6  
*trailing twelve months

What has driven performance in 1QFY11?
  • Sales of Procter & Gamble Hygiene and Health Care (PGHH) grew by a muted 1% YoY during the quarter as a result of price cuts and increase in excise duty. This is in spite of a 7% volume growth. The feminine hygiene category grew by 24% YoY in volume terms while sales growth for this category stood at 9% YoY. Growth in this category was led by Whisper. On the other hand, sales of the health care business grew by 12% YoY led by VICKS vaporub.

    Cost break-up
    As a % of net sales 1QFY10 1QFY11
    Total Cost of goods 35.4% 39.4%
    Staff Cost 3.9% 5.3%
    Advertising 13.1% 21.4%
    Other Expenditure 16.7% 19.6%

  • Operating income for the quarter fell by 48% YoY. This was because of increase in raw material costs, higher staff costs, rise in advertisement expenditure and higher other expenditure (all as a percentage of sales). Costs of goods sold increased by 13% YoY while staff costs increased by 36% YoY. Advertisement expenditure was up by 65% YoY and other expenditure rose by 19% YoY during the quarter.

  • Net profit for the quarter fell by 39% on YoY basis while net margins fell by 9.1% to stand at 13.7% in September 2010. This performance was due to fall in operating expense. However, higher other income (up 71%), lower depreciation charge (down 20%) and fall in effective tax rate (from 25.1% in 1QFY10 to 21.5% in 1QFY11) helped cap the fall in the bottom line.

What we expect?
At a price of Rs. 2,048, the stock is trading at 25.3 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 company has been facing cost pressure for 2 consecutive quarters now as a result. Given that the valuations of the company have run up sharply we would advise investors to exercise caution.

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