• Investment World
• eWorld
• Catalyst
• Mentor
• Life
• Canvas
• Praxis
• Urban Pulse
• Brand Quest

Aarati Krishnan

Price cuts on Vicks are beginning to pay off. - Paul Noronha

PROFIT growth at P&G Hygiene and Healthcare has been lacklustre over the past couple of quarters, as price cuts on its brands and a lower profit margin on contract manufacturing have taken a toll.

The March quarter numbers, however, suggest that the low price strategy is beginning to pay off in the form of higher sales volumes.

Shareholders can hold the stock, as accelerating sales growth will eventually trickle down to profits. But in the near term, the stock is likely to lag its peers, as profit growth is unlikely to match up to the levels demanded by its valuation.

Those who favour a more active approach can pare exposure and consider re-entry at a later date. At Rs 600, the stock trades at a price-earnings multiple of about 20 times its trailing four-quarter earnings.

Contract manufacture expands sales...

After closing the financial year ended June 2004 with robust sales and profit growth, P&G Hygiene has turned in tame numbers for this fiscal. For the nine months ended March 2005, the company's sales rose a healthy 18 per cent, but profits shrunk 4 per cent.

The sales growth is explained mainly by a 44 per cent increase in the volume of detergents and shampoos manufactured on contract for P&G Home Products, an unlisted group company that battles Hindustan Lever.

The sharp cuts in detergent and shampoo prices effected by the latter last year seem to have perked up its sales, translating into higher offtake from P&G Hygiene. Sales growth for P&G Hygiene's own brands — Vicks and Whisper — has been sedate at 6 per cent. This has resulted in a change in the company's sales mix over the past year.

Only about 60 per cent of P&G Hygiene's sales now come from its own brands, as against 64 per cent in 2003-04.

... but dents profit margins

The sharp expansion in the contract manufacturing business has not helped the company's profit margins, or even profit growth.

Though revenues from contract manufacturing have shot up from Rs 143 crore to Rs 205 crore in the nine months ended March 2005, profits from this business segment have remained flat at Rs 9.6 crore.

This indicates that P&G Hygiene has had to sacrifice margins on sales made to the group company.

Owned brands regain shine

While signals from contract manufacturing are not positive, those from the company's core hygiene and healthcare business are.

In the June-September period last year, the company effected a price reduction on Vicks and made a foray into the mass market for feminine hygiene products with the launch of Whisper Choice.

Though these initiatives have trimmed the profitability of this business in the short term, they have helped revive the flagging sales growth on the company's brand portfolio.

Over the past three quarters, there is a clear trend of improving sales growth in P&G Hygiene's branded portfolio. Sales growth in this business has accelerated from a negative 3 per cent in the September quarter to a positive 6 per cent in the December quarter and further to a healthy 16 per cent in the March 2005 quarter.

Profit growth from this segment, though on an improving trend, has been single-digit due to the base effect of the price cuts and royalty payments to the parent on branded sales.

Royalty payments have trimmed the nine-month profits by about Rs 13 crore; this accounts for 11 per cent of the profit before taxes. After adjusting for these factors, growth in sustainable profits for the March 2005 quarter is at about 5 per cent.

Over a longer time-frame, there is a possibility that P&G Hygiene will be part of a consolidation or restructuring exercise involving the two key P&G outfits based in the India.

The global merger of Gillette Inc's personal products business with that of P&G Inc, may eventually be replicated in India.

However, as Gillette India's product portfolio will be a better fit with that of the unlisted company, investors should not factor in any benefits from such an exercise when they invest in the P&G Hygiene stock.

Article E-Mail :: Comment :: Syndication :: Printer Friendly Page

Stories in this Section
Investment quiz

Copyright © 2005, The Hindu Business Line. Republication or redissemination of the contents of this screen are expressly prohibited without the written consent of The Hindu Business Line