Margin woes, valuations to weigh on P&G Hygiene

From its highs over the past month, the stock of Procter & Gamble Hygiene and Healthcare fell 7 per cent before recovering this week.

The stock has been an underperformer over the last year and has traded flat over this period.

Muted margin performance in the June quarter has also led to a cut in earnings estimates by the brokerages.

In addition, what could keep the stock under pressure in the near term are valuations that are in the expensive territory.

Going ahead, the Street will track the sales and margin trajectory.

The sales growth in the quarter came in ahead of the estimates in a seasonally weak quarter due to lower sales of Vicks.

The 10 per cent sales growth in the quarter was a combination of product-price mix, premiumisation, and growth in the feminine hygiene category.

Its annual growth rate over the past five years is 8 per cent.

For the full year (ending in June), the company reported a 7 per cent increase in sales to Rs 4,192 crore.

The company highlighted that the growth was achieved despite a continually challenging operating and competitive environment.

The gains over the year-ago quarter was on the back of innovation, premiumisation, which helped achieve category beating growth in the feminine hygiene category.

One-time tax related issues in the current as well as the base period has dented the bottom line, which came in at Rs 675 crore.

This was flat over the year-ago period.

Even as sales were better than expected, the company s performance slipped on the margin front.

While the gross margins expanded by 160 basis points year-on-year (Y-o-Y), it fell sharply by 710 basis points quarter-on-quarter (Q-o-Q) to 59.2.

This was lower than the 65 per cent plus number the Street was working with.

The rise in advertising, employees and other expenses also weighed on the operating profit margins that came in at 14.1 per cent.

Motilal Oswal Research highlights that the margin contraction of 1,080 basis points Y-o-Y and 1,160 basis points Q-o-Q was the lowest in 12 quarters.

The brokerage has cut earnings by 6-9 per cent for the next two years.

Analysts led by Naveen Trivedi of the brokerage say that the company is a long term core holding given robust growth potential in the feminine hygiene segment (65-68 per cent mix of FY24 sales) and the potential for market share gains, aided by strategic initiatives, including the fortification of significant market advantages.

There is potential for higher margin gains from the long-term trend of premiumisation in the feminine hygiene segment.

The analysts, however, have a  neutral  rating, given the expensive valuations at 62 times the FY25 earnings.

Nirmal Bang Research has an  accumulate  rating.

The brokerage awaits developments on the strategy front under the new CEO.

This is on the back of extremely high advertising levels and whether the same strategy will be followed in pursuit of taking top line growth back to double digits in the subsequent quarters.

While the 5-year sales growth is improving, it is still some way off the strong double-digit growth that it reported in the pre-Covid and high inflation phase,  said Krishnan Sambamoorthy and Sunny Bhadra of Nirmal Bang Research.

They maintain an  accumulate  rating as valuation seems fair at 053 times FY26 earnings.

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