P&G: Margin squeeze continues

Feb 14, 2012

Procter & Gamble Hygiene and Health Care Ltd. has announced its second quarter results for 2011-2012 (2QFY12) (June ending company). The company has reported a 18.7% YoY growth in sales and a 13.8% YoY increase in net profits. Here is our analysis of the results.

Performance summary

• Sales increased by 18.7% YoY during the 2QFY12 led by double-digit growth in sales of feminine hygiene. During 1HFY12, sales were up by 24.6%.
• Operating (EBITDA) margins for the company contracted by 140 basis points due to steep rise in raw material costs and wages. For 1HFY12, operating profitability reduced by 290 basis points.
• Earnings increased by 13.8% backed by 9.6% rise in operating income and 61% jump in other income.
• The net profits for 1HFY12 have grown at a robust 23% aided by 33% cut in tax outgo.

Rs(m)	2QFY11	2QFY12	Change	1HFY11	1HFY12	Change
Income	2,990	3,548	18.7%	5272.1	6568.7	24.6%
Expenditure	2,431	2,936	20.8%	4351.7	5606.4	28.8%
Operating profit (EBDITA)	559	613	9.6%	920	962	4.6%
EBDITA margin (%)	18.7%	17.3%		17.5%	14.6%
Other income	79	127	60.9%	165.5	255.1	54.1%
Interest	0	0		0.1	0
Depreciation	54	66	21.1%	102.2	129.8	27.0%
Profit before tax	584	674	15.4%	984	1,088	10.6%
Extraordinary inc/(exp)	-	-		-	-
Tax	135	163	20.7%	220.5	147.9	-32.9%
Profit after tax/(loss)	450	512	13.8%	763	940	23.1%
Net profit margin (%)	15.0%	14.4%		14.5%	14.3%
No. of shares (m)					32
Diluted earnings per share (Rs)*					52
Price to earnings ratio (x)*					35.84

*trailing twelve months

What has driven performance in 2QFY12?

• Sales of Procter & Gamble Hygiene and Health Care Limited (PGHH) grew by a robust 18.7% YoY during the quarter driven by 24% growth in sales of feminine hygiene products. The excise duty on feminine hygiene products was halved to 5% in the Union Budget 2011-12 that also contributed to the brisk growth. The healthcare category clocked a 7% rise in sales driven by the launch of Vicks Vapocool.

• The robust topline growth has failed to percolate to the operating level on account of a sharp rise in cost of goods sold. As a proportion of sales, the cost of goods sold increased by 200 basis points during the quarter. The staff costs and advertisement to sales ratios rose by 150 and 30 basis points, respectively. The share of other expenditure dropped to 17.8% from 20.1% in the year-ago quarter. But this measure was insufficient to plug the downfall in operating profit margin that slid by 140 basis points.

• At 13.8%, growth in net profit bettered the 9.6% rise in operating income on the back of a 61% jump in other income earned during the quarter.
  Cost break-up

  As a % of net sales	2QFY11	2QFY12	Change in basis points
  Total Cost of goods	38.3%	40.3%	199.84
  Staff Cost	3.6%	5.0%	145.48
  Advertising	19.3%	19.6%	30.07
  Other Expenditure	20.1%	17.8%	-231.66

What to expect?

PGHH has not launched new products or entered new categories for a long time. Despite lowered excise duty on feminine hygiene products, its profitability has remained under cloud. Its parent has announced expansion plans in the unlisted subsidiary, Procter & Gamble Home Products (PGHP) which is the largest subsidiary present in big categories such as laundry, skincare, haircare and is also the parent company's vehicle for new product launches and innovations. However, PGHH's presence in the under-penetrated feminine hygiene products lends it good growth potential.

At a price of Rs. 1,861, the stock is trading at 20 times our estimated FY14 earnings. However, at current valuations, the stock appears overpriced and we would advise investors to exercise caution.