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P&G: Margins under pressure

Nov 8, 2012

Procter & Gamble Hygiene and Health Care Ltd. has announced its first quarter results for 2012-2013 (1QFY13) (June ending company). The company has reported a 24% YoY growth in sales and a 6% YoY increase in net profits. Here is our analysis of the results.

Performance summary
  • Procter & Gamble Hygiene and Health Care (PGHH) registered a 24% jump in revenues led by 27% growth in feminine hygiene and 18% higher sales in health care.
  • Operating margins remained staid at around 11% on account of steep escalation in other expenses and employee costs.
  • Earnings increased by a tepid 5.8% as in the year-ago quarter there was a write-back in the tax provision.


Financial snapshot
Rs(m) 1QFY12 1QFY13 Change
Income 3,023 3,756 24.3%
Expenditure 2,671 3,328 24.6%
Operating profit (EBDITA) 352 428 21.8%
EBDITA margin (%) 11.6% 11.4%  
Other income 126 281 123.5%
Interest - -  
Depreciation 64 78 20.5%
Profit before tax 413 632 52.9%
Extraordinary inc/(exp) - -  
Tax -15 179  
Profit after tax/(loss) 428 453 5.8%
Net profit margin (%) 14.2% 12.1%  
No. of shares (m)     32
Diluted earnings per share (Rs)*     57
Price to earnings ratio (x)*     43.98
*trailing twelve months

What has driven performance in 1QFY13?
  • PGHH clocked a 24% growth in sales driven by category growth, pricing and initiatives. Its feminine hygiene business grew by 27% backed by category growth, pricing and innovations. The company's market share in feminine hygiene reached 54%. The healthcare sales grew by 18% on the back of strong growth in Vicks Cough Drops and Vicks Action 500.

  • However operating profitability remained flat at 11% on account of steep rise in other expenditure and higher wages. These have more than offset the cost savings arising as a result of controlled cost of goods sold and ad-spends during the quarter.

  • Despite a 21.8% rise in operating profit, the net profit has grown by a slower 5.8%. This was on account of reversal of tax provision to the tune of Rs 15 m in the year-ago quarter as compared to a tax outgo of Rs 179 m in the current quarter. The other incomes earned by PGHH reported a 124% jump aided by forex gain of Rs 40 m and onetime interest income of Rs 100 m on past litigation.

    Cost break-up
    As a % of net sales 1QFY12 1QFY13 Change in basis points
    Total Cost of goods 43.9% 43.4% -46.35
    Staff Cost 5.1% 5.8% 75.84
    Advertising 20.8% 18.2% -256.08
    Other Expenditure 18.6% 21.1% 250.00

What to expect?
Although PGHH has been reaping the benefits of under-penetration in feminine hygiene driving category growth and strong brand equity of the Vicks brand, its profitability has remained depressed.

At a price of Rs. 2490, the stock is trading at 26 times our estimated FY15 earnings. However, at current levels the stock is overvalued and we would advise a SELL.

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