P&G Hygiene and Healthcare: Buy at declines

Recommendation: Buy at declines

Aarati Krishnan

THE 23 per cent drop in the sales value is probably the most disturbing aspect of P&G Hygiene and Healthcare's financial performance for the quarter ended March 2001. But due to a series of divestitures, P&G Hygiene's financial performance for the quarter ended March 31, 2001 is not quite comparable to that for the corresponding previous period.

The company attributes this to the discontinuance of the shampoo manufacturing arrangement with P&G Home Products (a 100 per cent subsidiary of P&G Inc, US) in 2000 and ``inter-company sales adjustments''.

It is difficult to quantify the impact of the discontinuance of the shampoo manufacturing arrangement on P&G Hygiene's sales. However, the arrangement was discontinued in February 2000. Therefore, the contribution from this business was not available to P&G, at least over the previous two quarters of 2000. Yet, P&G's sales in the six months ended December 2000 grew 5 per cent, while it dipped 23 per cent in the March 2001 quarter. Therefore, it appears that the discontinuance of the shampoo manufacturing arrangement could have accounted for only part of the drop in sales for the March 2001 quarter.

However, P&G Hygiene claims that its core businesses registered a sales growth of 5.5 per cent during the quarter, after netting out the effect of divestitures and ``inter-company sales adjustments''. This appears to be in keeping with the growth rates recorded in the previous quarters.

Despite the fall in sales, P&G Hygiene has turned in a good profit performance, registering a net profit growth of 19.8 per cent to Rs 20.8 crore for the quarter. The operating profit margin during the period registered a big jump from 21 per cent to 33 per cent. Savings in costs and an increase in the proportion of high-value products are likely to have contributed in equal measure to this improvement.

In 2000, P&G Hygiene discontinued the shampoo manufacturing arrangement due to a change in formulation. It also hived-off marketing rights to brands such as Clearasil and Old Spice to Marico Industries to focus on its core business of feminine hygiene and cough and cold medication. With businesses such as detergents and personal products now vested with the wholly-owned subsidiary of the parent, only product launches relevant to P&G Hygiene's two core business categories are likely to be routed through the listed company.

Over the past couple of years, P&G Hygiene has been streamlining its distribution set up and workforce to retain its focus on its more profitable markets. This appears to have paid off in the form of better cost-efficiency. This apart, despite a flood of new entrants in the lower end of the sanitary

protection market, P&G Hygiene has steadfastly refused to participate in the bruising price war in the lower end of the market, where Kotex and Stayfree Secure have been fighting for market share.

Though P&G Hygiene initially lost in an expanding market, its strategy of sticking with the premium end of the market appears to have paid off in the form of higher margins. The sales growth rate in P&G's sanitary production portfolio has also looked up from a mere 2 per cent in 1998-99 (year ending June) to 32 per cent in 1999-2000. The successful launch of Whisper Ultra and Tampax in 2000 and P&G's decision to effect a 30 per cent cut in selling prices of this product in March 2001, could help pep up volume growth rate further.

P&G's only other product category -- cough and cold medication -- continues to be a slow-growing business, with a host of OTC and herbal products vying for attention. Here, it remains to be seen if P&G's crackdown on look-alikes and its recent product extension -- Vicks Plus -- peps up performance in this category.

After factoring in the performance for the March 2001 quarter, P&G Hygiene's per share earnings for the first nine months of 2000-01 stands at Rs 30. At the current market price of Rs 577, this translates into a price-earnings multiple of just 16 times. At this PEM, P&G Hygiene trades at a substantial discount to other MNC peers in the FMCG sector. Though some discount is justified on the grounds of P&G Hygiene's limited portfolio of products, the stock appears to hold limited downside at these levels. There is reasonable potential for appreciation based on the healthy growth prospects for P&G Hygiene's core businesses.