Pricey valuation pull down P&G Hygiene stock despite strong Q4 results

A resilient portfolio and margin gains though can help earnings grow at 18-20 per cent annually over next two years

Procter & Gamble Hygiene & Health Care’s (P&G Hygiene) June 2020 quarter (Q4) results surprised the Street with strong profits, despite Covid-led disruptions. Yet, the stock has shed 1.2 per cent since the result was announced on Tuesday last week. A key reason for this is the stock’s pricey valuation.

The maker of popular consumer product brands Whisper (a sanitary hygiene product) and Vicks (for cold and cough) follows the July-June accounting year.

The stock’s 1-year forward price-to-earnings (P/E) ratio is around 60x, which is at a 7 per cent premium to its long-term mean. It is also higher than the 56x of its well-diversified and larger rival Hindustan Unilever.

The P&G Hygiene stock’s performance in recent months also indicates the Street’s concern on valuation. With an over 3 per cent fall since March 31, it has underperformed the 12 per cent rise in Nifty FMCG index and the Nifty’s 33 per cent gain during this period.

According to analysts at Motilal Oswal Securities, P&G Hygiene’s valuations are expensive, at 62x its FY21 estimated earnings, implying limited near-term upside. The brokerage has maintained its ‘neutral’ rating despite P&G Hygiene having one of the most resilient product portfolio to withstand the pandemic.

 

 

In Q4, net sales were down marginally, compared to the year-ago period, to Rs 634.5 crore, as a result of the lockdown. However, its pre-tax profit saw close to a two-fold jump to Rs 105.6 crore amid strong gains in its operating profit margin. 

Besides a 427 basis point (bps) year-on-year (YoY) expansion in its gross profit margin, tight cost-control led to a 722 bps YoY rise in Ebitda margins to 17.4 per cent. However, similar margin gains may not be seen in the future, considering that the June quarter saw an over 40 per cent YoY fall in advertising spends to Rs 41 crore. 
 

But, beyond the near-term cap for the stock, the company’s outlook remains good.

MOSL’s analysts, who estimate a 20 per cent annual growth during FY20-22, are positive on the stock from a long-term perspective. They see strong growth opportunity in the feminine hygiene segment (which accounts for 70 per cent of P&G Hygiene’s sales, with potential for market share gains) as well as in the health care business. Moreover, depending on the pace of premiumisation, it could add to the firm’s margins. How the competitive intensity from players such as Stayfree of Johnson & Johnson pans out remains monitorable.

High dividend payout ratio of over 70 per cent adds to comfort, and is an indication of capital allocation policy.

For now, only investors with some risk appetite and a long-term investment horizon can consider the stock on corrections.