Procter & Gamble Hygiene: Hold

Recommendation: Hold

Aarti Krishnan

THE financial performance of Procter and Gamble Hygiene and Healthcare (PGHH) for the final quarter of the financial year-ended June 2000, conforms to the trend in the preceding three quarters -- a healthy profit growth that makes up for the stagnating topline.

For the quarter-ended June 30, 2000, PGHH almost doubled its net profit to Rs. 22.03 crores against Rs. 10.95 crores in the corresponding previous period.

`Other income' kicker: Part of PGHH's performance, no doubt, comes from the `other income' of Rs. 8.18 crores for the March-June quarter (Rs. 4.78 crores). The exact nature of the `other income' is not clear. However, a part of it may be the compensation received for discontinuing the contract for manufacturing shampoos for the wholly-owned subsidiary of the parent in end-1999.

Last year, the company had said it would receive ``suitable compensation'' for the permanent loss of revenues from this source. For long, PGHH had derived a substantial portion of its revenues from manufacturing products such as soaps, detergents and shampoos on a contract basis for P&G Home Products, the wholly-owned Indian subsidiary of the parent.

Impressive bottomline growth: But even after netting out this extraordinary component from both these quarters, PGHH's profit growth for the final quarter of 1999-2000 is still impressive at over a 100 per cent. This appears to have come mainly from cost-savings, which have resulted in a quantum improvement in operating profit margins. Over the past two years, PGHH has been revamping its distribution chain, making it more cost-effective and streamlining the distribution channels to focus on the promising markets alone.

In the latest quarter of March-June 2000, the company has probably been helped by the withdrawal of excise duties on the range of feminine hygiene products in the March 2000 Budget. Though the company has reduced the selling prices on some of its popular and mid-priced feminine hygiene products, it has held on to its priceline in respect of the super-premium products that it sells. This is likely to have helped boost margins at the operating level.

Flat topline: However, impressive as the profit performance may be, PGHH's topline growth, or rather the lack of it, has continued to be a cause for concern. After registering a promising 13 per cent growth in the third quarter-ended March 2000, PGHH actually reported a marginal decline in its net sales to Rs. 91 crores for the quarter-ended June 2000 from Rs. 97 crores in 1999. This more or less continues the trend of the first two quarters of the year. It may be early yet to conclude that the price reductions that PGHH effected after the Budget have failed to pep up volume growth as expected; but this disturbing trend bears watching.

Full year showing: Considering also the latest quarter performance, PGHH has managed to put a reasonable show for 1999-2000 on the profitability front, but a disappointing one on the sales front. While sales grew by just 1.4 per cent to Rs. 475 crores, net profits rose 32 per cent to Rs. 75.03 crores. The operating profit margins have improved significantly over the year from 19.1 per cent in 1998-99 to over 22 per cent in 1999-2000.

On the one hand, this is evidence that the company is indeed reaping the benefits arising from the streamlining of its distribution chain, which is a good sign. But, on the other, a massive overhaul of the distribution chain, such as the one the company is attempting now, has the potential to impact the company's position in the marketplace seriously over the next couple of years. On this count, there is little indication of how the company is faring.

Limited product portfolio: As for its topline, the company's limited product profile is a minus factor from the investor point of view. After the divestiture of its detergents and personal products business, PGHH's core product categories are restricted to feminine hygiene products (under the umbrella brand Whisper) and cough and cold medication (Vicks).

It is clear that product launches from the parent will be routed through PGHH only if they conform strictly to these two product categories. Tide detergent and Tempo tissues -- two recent key launches from P&G's worldwide portfolio -- were routed through the wholly-owned subsidiary and not PGHH. Only Tampax -- a feminine hygiene brand -- was through PGHH. Such extreme focus could restrict the extent to which the listed company can draw on the strengths of its parent's portfolio.

True, the company has been active in its existing product categories, launching brand extensions such as Whisper Ultra, Vicks Cough Drops and, recently, the Tampax brand of tampons. However, each of these is essentially a small niche market and whether it has the potential to contribute substantially to PGHH's topline in the next couple of years. Meanwhile, the company's sales volume growth continues to be under threat from intensifying competition. If a host of brands, such as D'Cold from Paras Pharma and Amrutanjan Cold Rub, have been challenging Vicks' traditional dominance in the cold medication segment, low-priced sanitary napkins (from ambitious contenders such as Johnson and Johnson and Kimberly Clark Lever) are trying to enter the feminine hygiene market. Therefore, unless PGHH makes dramatic changes in its product portfolio, impressive topline growth could continue to be elusive.

Straining valuation: This could continue to hinder a higher stock market valuation for the PGHH stock within the FMCG basket. After all, the breadth of the product portfolio is crucial when it comes to weathering a difficult FMCG market and leveraging better distribution terms from trade.

In this respect, competitors, such as Hindustan Lever, Britannia or Nestle, could continue to attract a better valuation than the PGHH stock. This could be one reason why the PGHH stock did not manage as strong a recovery as the BL Consumer Confidence Index during the brief period of recovery in FMCG stocks in mid-July 2000.

However, at the current price of Rs. 662 (price earnings multiple of 18 times latest earnings, against 32 times for the BL Consumer Confidence Index), there appears to be little downside risk in the stock. Shareholders can stay on, and switch at a significant uptrend in price.