P&G Hygiene: In the pink of health

Exit from the low-margin business makes P&G Hygiene attractive

Procter & Gamble Hygiene (P&G)'s exit from the low margin contract manufacturing (detergents) business last October has seen its operating margin improve by 770 basis points, y-o-y, to 22.5 per cent in the June quarter.

The company's manufacturing business-related raw material costs "� as a percentage of sales "� fell substantially to 29.6 per cent in the quarter from 47.1 per cent in the June 2005 quarter. Other expenditure as well as staff costs also saw a decline in the June quarter.

Health and hygiene products witnessed a healthy 20.8 per cent revenue growth during the quarter. Sales of the Vicks range improved by a huge 29 per cent in Q4FY06 despite the time being a part of summer season.

The Whisper feminine hygiene products also grew by a good 15 per cent, coming on a higher base in the June 2005 quarter. The full-year sales grew 18 per cent, driven by a 23 per cent growth in the feminine hygiene business and a 17 per cent growth in healthcare.

Vicks Vaporub continues to be the market leader, while sales of Vicks Cough Drops grew an impressive 31 per cent. With Whisper, too, having improved its market share, the company launched the value-priced Whisper Choice nation-wide.

P&G's operating profit margin for the full year ended June 2006, too, improved by 342 basis points to 22.9 per cent. Profit before interest and tax margin in the contract manufacturing business was just 5.52 per cent, whereas that in the health and hygiene business was 34.5 per cent.

The P&G stock, which has been underperforming the Sensex over the last year, appears reasonably priced at 20 times its trailing earnings, given that the company is out of the low-margin business.

UltraTech: Concrete plans

UltraTech Cement is planning a capex of Rs 2,700 crore to augment its capacity. As part of this plan, the company will increase its cement capacity in Andhra Pradesh by 4 million tonne and install captive power plants.

UltraTech's consolidated capacity is currently pegged at 17 million tonne, with nearly 60 per cent of its output sold in the western markets and 20 per cent in the south, say analysts.

The demand for cement has recently revived in the southern states and, hence, prices are on a rise. By FY09, analysts say, the southern markets are likely to see an equilibrium in the demand and supply situation with other players raising their capacities, too.

The current annual cement consumption in these states is 37 million tonne, which, analysts expect, to rise by 5 million tonne by FY09.

In the June quarter, UltraTech's operating profit margin grew by 1,290 basis points, y-o-y, to 31.7 per cent in Q1.

A growth of 11.4 per cent, y-o-y, in overall sales volume to 44.55 lakh tonne, coupled with about 27 per cent rise in domestic cement price realisations, helped the company in putting up a better show. The UltraTech stock trades at about 15 times its estimated FY07 earnings.

TVS Motors: Bumpy ride

Despite a strong sales growth of 25 per cent, y-o-y, TVS Motors' June quarter numbers were disappointing because of a y-o-y fall of 230 basis points and q-o-q fall of 120 basis points to 4.5 per cent in its operating profit margin.

The operating profit dropped by 16 per cent, y-o-y, dragging down its net profit by 15 per cent. The rise in sales, helped by a small price hike in end-June, was impressive and higher than the volume growth of 22.4 per cent.

At 32 per cent, y-o-y, motorcycles, in particular, witnessed a good volume growth, though it came off a lower base than that of its peers.

Along with staff expenses, the main reason for the margin pressure continues to be the high costs of raw materials as a percentage of sales, which in fact rose by 190 basis points, y-o-y.

Moreover, though the momentum in volume growth will continue given the strong economic environment, the company's profitability could remain subdued because of the high proportion of entry-level vehicles, which command lower margins.

Also given the competition, TVS may not be in a position to pass on cost rises, while needing to maintain advertisement and selling expenses simultaneously.

At the current market price of Rs 95, the TVS stock trades at nearly 20 times its estimated FY07 earnings and 14 times FY08 earnings.

While the earnings growth may be strong in FY08, it is nonetheless likely to underperform its peers.

With contributions from Amriteshwar Mathur and Shobhana Subramanian