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P&G: Depreciation takes off some sheen - Views on News from Equitymaster
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P&G: Depreciation takes off some sheen
Oct 30, 2009

Performance summary
  • Net sale for P&G during 1QFY10 grew by 19.6% during the quarter thanks to strong performance of the feminine hygiene business.
  • Operating (EBITDA) margins for the company remained flat at 30.8% as the saving from lower employee expense and other expenditure was offset by higher raw material costs and investment in brand building.
  • Net profit margins for the quarter fell by 1.8% to 24.2%. This fall comes on the back of lower other income and higher depreciation expense.


Financials
(Rs m) 1QFY09 1QFY10 Change
Net Sales 1,888 2,258 19.6%
Expenditure 1,308 1,561 19.4%
Operating Profit (EBDITA) 581 697 20.0%
Operating Profit margin (%) 30.7% 30.8% 0.3%
Other Income 61 51 -17.2%
Interest 0 0  
Depreciation 32 60 87.8%
Profit before Tax 610 687 12.7%
Tax 118 140 18.5%
Profit after Tax/(Loss) 492 547 11.3%
Net profit margin (%) 26.0% 24.2%  
No. of Shares (m)   32.5  
Diluted Earnings per share(Rs)*   55.8  
P/E Ratio (x)*   26.9  
* trailing twelve months

What has driven performance in 1QFY10?
  • Feminine hygiene grew by 32% YoY during the quarter on the back of Whisper Choice and Whisper Ultra. The growth in health care was up by 7% YoY led by strong growth of VICKS Action 500, VICKS cough drops and VICKS inhalers.

  • During the quarter, the company invested heavily in brand building due to which the advertisement expense grew by 25%. While the raw material cost also increased by 42%, other expenses including employee costs fell by 8%. This resulted in operating margins remaining flat during the quarter.

  • While net profit grew by 11% during the quarter on the back of higher sales, it was negatively affected by lower other income and higher depreciation.

    Cost break-up
    As a % of net sales 1QFY09 1QFY10
    Total Cost of goods 29.8% 35.4%
    Staff Cost 5.9% 3.9%
    Advertising 12.6% 13.1%
    Other Expenditure 21.0% 16.7%

What to expect?
At a price of Rs. 1,500, the stock is trading at 27.4 times our estimated FY11 earnings. The company has performed much better than we estimated. This was due to higher growth in Feminine Hygiene products. We believe the company has high growth potential due to low penetration of this product.

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