The Hindu Business Line : P&G Hygiene: Hold

IN WHAT is a big move for an FMCG stock, the P&G Hygiene (PGHH) stock has appreciated by 60 per cent since August this year, to trade at Rs 765. Over the same period, the price-earnings multiple has improved from 13 times its trailing four quarters earnings to 24 times. Indications of the parent's reviving interest in its Indian operations, and PGHH' s strong numbers for the just-concluded quarter, appear to be behind the re-rating of the stock.

The re-rating has brought PGHH's valuations almost in line with larger FMCG peers such as Hindustan Lever and Colgate-Palmolive India. But shareholders in the PGHH stock can hold on to their investments on two counts.

The company's earnings growth rate in recent times has been superior to its peers and this is likely to be sustained for now. The company has also recently announced a bonus offer (record date December 11). Empirical evidence over a fairly long period suggests that in the case of fundamentally-sound companies, investors may stand to benefit by holding on to a stock until it trades ex-bonus.

Unlike companies such as Hindustan Lever or Colgate-Palmolive India, PGHH's product portfolio comprises mainly of products which do not reach a significant proportion of the Indian market. With Vicks and Whisper constituting the two key money-spinners for PGHH, its product portfolio is narrow, but holds potential for high growth, if the company manages to attract new consumers into its fold.

Over the past one year, PGHH has unveiled a new pricing initiative across its product range. To make its products more affordable, the company slashed prices of its premium detergent and sanitary napkin brands and unveiled new promotional offers for its Vicks range. These moves appear to be paying off. In 2002-03, the Vicks franchise grew 8 per cent and the Whisper franchise 12 per cent in value terms. In the quarter ended September 2003, this picked up to 32 per cent and 15 per cent respectively. While Vicks sales were helped by the widespread monsoons and the promotional offers unveiled in the first six months of 2003, Whisper Ultra continued to carry the day for the hygiene segment.

A few new initiatives could help sustain the momentum in volume growth. In the recent times, PGHH has also rolled out sampling initiatives for both its key product ranges. While prices of sachet packs of detergents have been further slashed to encourage trial, the selling prices for the entire Vicks range has been re-aligned at lower price points.

The recent launch of Vicks Formula 44 cough syrup, after a long hiatus on new launch activity, adds some welcome breadth to PGHH's product portfolio.

The volume benefits from these initiatives are likely to kick in only over the next couple of quarters. But since many of these initiatives involve some sacrifice on the pricing front, PGHH's profits could temporarily continue to exhibit a slower rate of growth than its topline, at least in the near term.

Given the steep rise in the stock valuation in the recent times, and the limited scope for further improvement in valuations, investors need not contemplate fresh investments in the stock at this juncture.