Procter & Gamble Hygiene - Valuations offer no upside - Standard Chartered Securities

IN-LINE, PG IN, CMP INR 2801.05, Price Target INR 2678.0

- In 4QFY13, net sales grew 35%, EBITDA 67%, & PAT 47%. Despite a 420bps decline in gross margin, OPM expanded 330bps to 17.2%, as operating expenses rose only slightly.

- FY13 sales momentum remained strong, up 30% y/y, but EBITDA margin declined 100bps y/y to an all-time low of 15% (versus a high of 28% in FY08).

- IER still expects margin improvement, but unfavourable currency conditions lead IER to lower its margin expansion estimate and cut its FY14/15E EPS by 4%/5%.

- Valuations remain elevated with a forward P/E of 34x. IER maintains its In-Line rating with a revised price target of INR 2,678 (versus INR 2,291 earlier).

4QFY13 – Sales momentum continues; margins expand

PGHH reported net sales growth of 35% y/y: IER believes feminine hygiene segment's performance was strong, while healthcare growth was steady. Old Spice (included since March 2013) likely contributed c.10% to 4QFY13 sales.

Despite a gross margin decline of c.420bps y/y, lower operating expenses (down 750bps) supported a 330bps expansion of OPM. This resulted in EBITDA growth of 67%, but higher taxes lowered PAT growth to 47% y/y. Given the volatility of quarterly expenses IER believes it makes more sense to look at full year performance.

FY13 – Sales robust but margins continue to decline

Sales grew a strong 30% y/y on the back of an estimated c.35% growth in feminine hygiene and c.12% growth in healthcare (Old Spice contributed c.3% of sales). Growth in the feminine hygiene segment was likely driven by rising penetration, promotions, as well as pricing.

Due to an inferior mix (higher sales of Whisper Choice), gross margin has been under pressure and fell 130bps y/y to 58.3% in FY13 (down 15ppt in the past five years). OPM dropped 100bps y/y to 15.1%. Expiry of the Baddi unit's tax benefits took taxes to 29% (23% in FY12), resulting in muted PAT growth of 12%.

IER reduces its margin estimates, maintain In-Line: FY13 margins are at an all-time low of 15%, but positive changes seem likely as IER expects PGHH to prioritise margins over growth. IER looks for OPM to expand y/y, but lower IER's FY14E/15E estimates to 16.8/17.8% (from 18.2/19.8%) due to an unfavourable currency (c.40% of inputs are imported). Despite an EPS cut of 4-5%, IER expects a sales CAGR of 25% and EPS CAGR of 32% over FY13-15E. However, this is already reflected in current valuations (FY14E P/E: 34x). IER maintains its In-Line rating with a revised PT of INR 2,678 (INR 2,291 earlier) based on 25x FY15E EPS.

Source : Equity Bulls

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