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P&G: Good start - Views on News from Equitymaster

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P&G: Good start
Nov 1, 2007

Performance summary
  • Topline jumps 16% YoY on account of double-digit growth in its core portfolio.
  • Margins expand by 5.9% YoY on the back of lower advertisement and other expenses.

  • Bottomline witnesses a 35% YoY growth in 1QFY08 led by higher operating income.

(Rsm) 1QFY07 1QFY08 Change
Net Sales 1,298 1,508 16.2%
Expenditure 968 1035 7.0%
Operating Profit (EBDITA) 330 473 43.2%
Operating Profit margin (%) 25.5% 31.4%  
Other Income 48 48 0.2%
Interest 0 - -100.0%
Depreciation 19 25 32.1%
Profit before Tax 359 496 38.1%
Tax 104 151 46.3%
Profit after Tax/(Loss) 256 345 34.8%
Net profit margin (%) 19.7% 22.9%  
No. of Shares (m) 32.5 32.5  
Diluted Earnings per share (Rs)*   30.4  
P/E Ratio (x)*   24.0  
*(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 2005, 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 1QFY08?

Double-digit growth: The company reported 16% YoY growth in the topline for 1QFY08. The sales of the Health Care Category were up by 15% YoY, while the Feminine Hygiene products grew by 17% YoY. Robust growth of Vicks Vaporub, Vicks Cough Drops and Vicks Inhaler aided the growth in the health care segment. The Feminine Hygiene growth is led to the strong performance of Whisper Choice and Whisper Ultra. Further good monsoons, effective advertising coupled with increased sales distribution attributed to the strong performance in the rural areas as well.

Expansion in margins: The margins for 1QFY08 jumped 5.9% YoY led by lower ad spends and other expenses. The ad spends as a percentage of sales fell from 13% in 1QFY07 to 8.5% in this quarter. The other expenses stood at 28% of sales in 1QFY08. Also, the effect of the divestment of its detergent manufacturing facility is paying off. 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.

Cost break-up
As a % of net sales 1QFY07 1QFY08
Total Cost of goods 25.2% 25.9%
Staff Cost 5.8% 5.9%
Advertising 12.6% 8.5%
Other Expenditure 30.9% 28.4%

Over the quarters: It is doing well on the margin front over the last quarters. The fall in the net margins was aberration due to the extraordinary item in the previous quarter. Further, higher operating income aided the growth despite the fact that the effective tax rate has increased from 29% to 31% in this quarter.

What to expect?
At the current price of Rs 730, the stock is trading at a price-to-earnings multiple of 24 times its trailing 12-month earnings. The company is doing well on the sales front. With building the brands, it has also increased its distribution. The management is confident of the momentum continuing. However, stretched valuations from a medium term perspective and concentrated revenue base makes the company a risky proposition.

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