Pricing, ad spends to sustain P&G Hygiene's out-performance in near term

Brokerages have upgraded the stock on expectations of double digit growth

Shares of Procter & Gamble Hygiene and Health Care (P&G) have risen 14 per cent so far this month on the back of strong performance in the December quarter. The company reported an 18.5 per cent increase in net sales, compared with a year ago, taking its revenues to Rs 1,018 crore. This is the second consecutive quarter of 18 per cent plus sales growth (see table/chart). 

The sales growth was better than the aggregate sales uptick of about 11 per cent reported by fast-moving consumer goods (FMCG) companies. While sector revenues were led by festive sales, pent-up demand, and rural recovery, the company highlighted strong retail execution, product portfolio and market recovery as reasons for the higher top line. 

This is the third consecutive quarter of better-than-sector growth with both its key segments of feminine hygiene and healthcare posting double-digit growth. Increasing demand and new product launches across segments of Whisper, Vicks, and Old Spice bode well. The sector outperformance means the company is gaining market share across categories of hygiene as well as Vicks and its sub-segments of Vaporub, cough drops, and tablets. 

Aided by product promotion in schools, lower pricing, and higher advertising, the company is expected to sustain double-digit growth in the near to medium term. 

The strong top line performance aided profitability expansion. While the gross margins came in higher than estimates at 69 per cent up 670 basis points (bps) year-on-year (YoY), operating profit margins were up 350 bps to 25.2 per cent. Though advertising spends and employee costs were down as a percentage of sales, a sharp rise in other expenses offset the gains at the gross profit level. Adjusted for one-time changes, net profit growth came in at an impressive 34 per cent. 

Motilal Oswal Research has upgraded the stock to ‘buy’ from ‘neutral’ after the results. Its stand earlier was based on muted earnings growth in the past three years and expensive valuations. FY20 sales growth was also weak at 1.9 per cent YoY. 

Krishnan Sambamoorthy of Motilal Oswal Research believes the stock is a long-term bet, given the large category growth potential in the feminine hygiene segment, which accounts for about two-thirds of sales. 

The company is also expected to gain further market share given the considerable moats it has built over the years that coupled with increasing premiumisation could lead to higher margins. 

Given the rise in stock prices, P&G is trading at 46 times its FY23 earnings estimates. This is marginally lower than sector leader HUL’s 48 times valuation. Analysts advise to await correction before buying the stock.