Underpenetrated markets, low per capita consumption and well established brands will translate into high growth rates for Procter & Gamble.
A basket of popular products, access to superior technology and good understanding of consumer needs are factors that have helped Procter & Gamble Hygiene and Health Care (P&G) report robust growth rates in the past. The company, however, has not been resting on its laurels. In fact, P&G has been proactive in building near-term as well as long-term growth drivers, which will not only help maintain leadership in its businesses, but also in sustaining growth rates going ahead. In this light as well as given the current uncertain market conditions, this stock is a good investment, offering a combination of growth as well as safety at reasonable valuations.
Strong businesses
For decades, its ‘Vicks’ brand has been synonymous with remedies that cure cold and cough. Various innovations in the past have helped maintain healthy sales growth in the healthcare business (Vicks branded products; estimated market share of 17 per cent), which contributed a little over Rs 300 crore to sales in FY08. Going forward, says Pritee Panchal, analyst, SBICAP Securities, “There is a lot of potential in this segment, but don’t expect high growth rates-expect about 10 per cent annual growth on an average. That’s because, Vicks Vaporub, Formula 44 and Inhaler are seasonal products. Vicks Cough Drops (in candy form) though is more of confectionary product and will help this segment grow fast.”
The feminine care business, which sells sanitary napkins under the ‘Whisper’ brand, has reported an average annual growth rate of 20 per cent in the last five years. It clocked sales of Rs 340 crore in FY08, representing a year-on-year growth of 21 per cent. The growth rate was higher at almost 30 per cent in the first quarter ended September 2008, driven by 50 per cent growth in ‘Whisper Choice’ and 34 per cent in ‘Whisper Ultra’. Says Panchal, “A 50 per cent growth in the mass segment product (Whisper Choice) in Q1FY09 signifies growing acceptance, affordability and usage of these products among the middle-class urban women.”
Analysts expect this business to clock growth rates of over 22 per cent (average), which should help Whisper, a leader in urban India with a market share of 50 per cent (value terms), become a $100 million brand in two years.
Favourable prospects
While the slowing economic growth may have a marginal influence on demand, the fact that the company’s products are driven more by necessity rather than luxury (discretionary) provides comfort. Notably, the overall growth dynamics for the businesses continue to be very favourable.
Consider this. In case of sanitary napkins, statistics (source: company) indicate that there are 26.6 crore menstruating women in India, of which, only three per cent use branded sanitary napkins. Even if the economically weaker population is excluded, the penetration levels would be far lower than 32-60 per cent in other developing economies like Thailand, Philippines and China (in developed countries like USA and Japan, it is over 85 per cent). The other evidence of long-term growth opportunity is the fact that by 2050, more than half of India’s population will be under the age of 25 years.
That apart, the growing population of working women, increasing literacy levels, higher disposable incomes and the expanding middle- and upper-middle class are some key factors that clearly indicate the huge potential for companies like P&G and hence, will help drive growth rates in the future.
Right moves
Among various initiatives, the introduction of low value packs (Rs 5 pack of Vicks Vaporub) and mass segment products (Whisper Choice) has helped the businesses grow at a fast clip on the back of increased volumes. On the other hand, the company’s emphasis on delivering new solutions based on customer needs has helped it stay ahead of competition. For instance, in FY08, P&G upgraded its ‘Whisper Maxi’ product in line with customer needs.
In the long-run, P&G’s initiative through the ‘Whisper School Program’ will help raise awareness among consumers and build the path for future growth. The programme involves educating adolescent girls and mothers about hygiene care, and so far has reached 6 million girls (1.6 million in FY08). The impact of this programme has been encouraging. According to the studies undertaken, while two-thirds of the school girls were using cloth (instead of sanitary napkin) before the programme, only six per cent continued to use cloth after the programme.
| ROBUST MARGINS | |||
| Rs crore | FY08 | FY09E | FY10E |
| Net sales | 646 | 775 | 910 |
| Net profit | 131 | 170 | 200 |
| OPM (%) | 28 | 28 | 28 |
| EPS (Rs) | 40.5 | 52 | 62 |
| PE (x) | 18.2 | 14 | 11.9 |
| Source: CapitaLine Plus, analysts reports | |||
In a recent move, the company tied up with National Rural Health Mission, Rajasthan, to educate the rural women about hygiene issues. Such measures should help improve education levels among women and thus, increase penetration of sanitary napkins in the rural areas, which so far has been negligible. In short, it should prove helpful for P&G in the long run.
Growth blocks in place
During FY06-08, the company invested nearly Rs 60 crore towards capacity creation (Rs 10 crore was invested in its Goa plant for hygiene products and Rs 26.7 crore in Baddi plants for healthcare products, in FY08 alone), thereby almost doubling the fixed assets to Rs 123.10 crore in 2007-08. While the two Baddi plants enjoy tax incentives and help the company lower its tax expenses, these investments are sufficient to take care of the company’s capacity requirements for the next few years. Nonetheless, the low capital-intensive nature of the businesses and high cash-flows suggest that internal accruals are more than enough to take care of future capex, whenever the need arises.
More importantly, the company enjoys the backing of its US-based parent, The Procter and Gamble Company, which offers the necessary technology and products, helping it to sustain growth rates. In return, the company pays royalty to its parent, which works out to about five per cent of sales. Even thereafter, P&G ends up with a hefty net profit margin of 20 per cent (partly helped by tax incentives), which is enviable.
Investment rationale
There is no doubt that the company has in place the key growth ingredients like strong brands, access to latest technology, healthy balance-sheet and an insight into consumer behaviour. The under penetrated markets, rising population of working women, low per capita consumption and, improving income and literacy levels are also conducive for long-term growth.
All these should help P&G achieve topline growth of 16-18 per cent for many years and become a Rs 1,000 crore company in the next three years. Notably, profits should grow faster at over 18 per cent, to some extent helped by lower taxes. At Rs 735, quoting at a PE of 14 times (not adjusting for the cash, worth Rs 51 per share, held as on June 2008), the stock can deliver 18-20 per cent annual returns for next two-three years.
