Procter & Gamble: Efficiently managed - Outside View by Luke Verghese

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Procter & Gamble: Efficiently managed
May 19, 2014

A company in fine fettle which is charging ahead with the right brands, and with markets which are expanding by the year.

Celebrating its golden jubilee

For an MNC of its standing, that P&G is, and which is close to celebrating the golden jubilee of its existence as a corporate entity in India, it does not appear to have come very far given the opportunities that India has to offer to the various contestants in the arena of the FMCG space. But, the turnover of the listed entity Procter & Gamble Hygiene & Healthcare does not tell the full story. And, regardless of its performance results, it is a true MNC operation at play. It is categorised by other group operating companies in India which are independent operations in themselves, but nevertheless, wholly owned siblings of the ultimate parent or its nominees. There are revenue and capital account interactions on a variety of accounts between group companies which give the impression of a well oiled machine at work and guided by a knowledgeable set of individuals, and systems in place. It makes one wonder whether the profitability of an enterprise within the group is a very efficiently monitored operation. It is also the only MNC that I have surveyed which makes do with a June year ending. Does this year ending dovetail with that of the parent?

Officially, the group has three companies operating in India-the publicly listed company under the scanner (which I think was originally called Richardson Hindustan), Gillette India-another listed entity, and a privately held company going by the name Procter and Gamble Home Products Ltd. But there is a fourth company at play-sporting the name Wella India Hair Cosmetics Pvt Ltd. Atleast this is what I can make of the big picture. They are all deemed fellow subsidiaries under the law. But these companies themselves are held through a pyramidical structure from the available evidence. There are three India holding companies -Procter and Gamble India Holdings BV-the latter is an acronym for a company incorporated in the Netherlands, Procter and Gamble India Holdings Inc, and Procter and Gamble Overseas India BV. There are two other identifiable companies related to the India operations and mentioned separately -Rosemount LLC, and Temple Trees Impex & Investment Pvt Ltd. What's up with so many incorporated companies to control the holding in one piddling operation? The ultimate holding company is The Procter and Gamble Company USA. Only the ultimate parent company appears to have the prefix THE attached to its name. It is probably supposed to be some sort of a feather in its cap.

Running on its own juices

For a turnover that it ratchets up the company makes do with a piddling paid up capital base. It clocked in gross revenues from operations of Rs 17 bn against Rs 13 bn previously. Stripped of the excise duty element the nett revenues were only very marginally lower. It also pocketed other income of Rs 670 m against Rs 509 m which in turn accounted for a sizeable 23.4% of the pre-tax profit against 22.8% previously. The pre-tax profit clocked in at Rs 2.8 bn against Rs 2.2 bn previously. The paid up capital weighed in at Rs 324 m (face value Rs 10) of which 70.6% is held by the parent company. That would imply a paid up capital to turnover ratio of a humungous 1:52. It boasts reserves of Rs 7.7 bn at year end-almost all of it in the form of free reserves.

Not that it is affecting the financing pattern of the company one bit. It is debt free and hence pays out no interest. It runs on its own juices. Being a marketing company which is in the business of selling ointments and creams, cough drops, tablets, and, personal products and toilet preparations, it is also compounded by a merry go round of purchases and sales within the group. The big buck expenses other than the input costs are in trade incentives and in advertising costs. (Some of the big ticket brands include Whisper, Vicks, and Old Spice. The listed Indian offshoot does not have much of a product portfolio). Is it deliberate perhaps? Some of the other big brands must be marketed by the non listed siblings. The cost of 'trade incentives' debited to the P&L account amounts to Rs 1.25 bn against Rs 960 m previously-up 30% -- which implies that the company is facing quite some competition in the products that it is raring to market. Probably as a result, the advertising costs were limited to an increase of only 16% to Rs 1.6 bn. These expenses are juxtaposed against a 30% increase in nett revenues from operations. Input costs inched up sharply to 41.8% of nett revenues against 40.4% previously, again implying perhaps the inability to pass on cost increases.

Inter group transactions by the score

In this masala mix, the purchases of stock in trade amounts to Rs 2.44 bn-almost all of it appears to have been sourced from group companies. The sales to group companies amounted to a relatively minor Rs 183 m, along with a recovery of expenses, reimbursement of expenses, purchase of assets, BPO expenses, other expenses cross charged, reimbursement of expenses cross charged, loans given, royalty costs of Rs 710 m against Rs 570 m and so on-which are all a part of the complex deal. The imported goods pertain solely to 'personal products and toilet preparations' etc. Assuming that the entire stock in trade purchased was flogged in the year of purchase, the sales from this purchase realised Rs 3.45 bn which implies that the company realised a gross margin of Rs 1 bn. That is a cool sum of money rolling into its kitty. There is no knowing however what the bottom-line on the transaction was. But it could be fairly substantial in my reckoning.

Though its product portfolio is narrow, it exercises considerable clout in the market which further accentuates its cash flow. The trade receivables at year end at Rs 808 m was only a whisker of the gross revenues from operations. The trade payables at year end on the other hand were substantially higher at Rs 2 bn. The current assets at year end are however sharply higher than the current liabilities, as the company has advanced large sums of excess cash generated from operations to other India based group companies as also Rs 67 m to its employees-down from Rs 113 m at the previous year end. (It is indeed a very generous employer). The loans to group companies are as much as Rs 4 bn, while advances made to them add up to another Rs 310 m. It is the interest emanating from these loans and advances which add up to the sizeable other income figure. The total interest for the year on such advances amounted to Rs 392 m. In any case this is an excellent way of boosting the bottom-line with no risk involved. Another sizeable one time accretion under this head is the interest on IT refund of Rs 122 m.

The importance of traded sales

It would appear that the profit made from the sale of imported finished goods, and interest income as detailed above is what is keeping this company ticking. In any event, the company generates quite some cash from its operations and there is no place to invest the excess cash including in capital assets. The company generated favourable cash of Rs 1 bn from operations and could spend only Rs 378 m in gross block addition. To this, add the other income receipts and it was in a very enviable position.

Being a marketing company the primary focus is not on the accretion of capital assets. The company makes do with four plant locations-two in Goa and two in Himachal Pradesh. The gross block as on date amounts to Rs 3.7 bn -inclusive of additions during the year--and these assets rustled up manufactured nett revenues of Rs 13.4 bn. Interestingly enough, the company appears to be marketing products which attract NIL excise duty or close to that.

The company is flogging well known brands-though the portfolio is limited --and given the market that the company caters to, it is on a good wicket. In the last ten accounting years, the company has gone through some hiccups though, as the financials highlights show. In the accounting years 2006, 2007 and 2008 the revenues were off-track -but it has been smooth sailing since. The other important information that should be made note of is in the employee strength. It stood at 345 nos as on 2004 year end, fell to a low of 250 thereafter, and presently amounts to 408 members. That is productivity at work.

Disclosure: I do not hold any shares in this company, either directly, or under any non discretionary portfolio management scheme.

This column Cool Hand Luke is written by . Luke has been a business journalist, financial analyst and knowledge management head with a professional experience of more than 20 years. An avid watcher of the stock market, he has written extensively on stock market trends. His articles have featured in Business Standard, Financial Express and Fortune India amongst others. He has also been the Deputy Editor, Fortune India and the Financial Editor of The Business and Political Observer.


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