FY17 a blip for Procter & Gamble Hygiene

Growth rates expected to pick up, but steep stock valuation a hurdle

Procter & Gamble Hygiene and Health Care’s (P&G) June quarter (Q4) results may have fallen short of the Street’s expectations, but the latter doesn’t seem to be worried, given that the stock closed with marginal gains on the National Stock Exchange (NSE) following its results on Wednesday. The Street attributed the miss to a one-off.

P&G, a 70.64 per cent subsidiary of US-based consumer giant Procter & Gamble Corporation, sells consumer products.

The company missed on its top line because of the goods and services tax-(GST) led destocking amid volatile trading conditions. Its profitability was impacted due to elevated costs, especially of raw material. Gross margins, as a percentage of net sales, fell 387 basis points (bps) year-on-year (y-o-y) compared with analysts’ expectations of a 120-130 bps fall. Though the company did well on controlling employee and advertising & sales promotion costs, which on a combined basis fell 30 per cent y-o-y to ~49 crore, these gains were partly offset by a surge in other expenses. The sharp dip in margins is also being attributed to the high base of last year.

In the June 2016 quarter, Ebitda (earnings before interest, tax, depreciation and amortisation) margin had surged 500 bps sequentially and over 300 bps y-o-y. Adjusted for these, the fall is largely in line with expectations. The company has not provided segment-wise data of sales. According to a spokesperson, P&G does not comment on results. Depreciation charges surged 58 per cent and tax outgo was higher than estimates. With P&G paying out a special dividend of ~1,175 crore to its shareholders (dividend distribution tax was ~239 crore), other income (a majority of it being interest income) more than halved to ~10.8 crore. This could fall further as the dividend payout was done around May-end or early June.

For the year ended June 2017, P&G managed to grow its sales two per cent and net profit by 2.2 per cent. While the growth appears paltry, analysts say it is decent, given the twin impact of demonetisation and the GST. In the past five years, P&G’s profits have grown at an average 23 per cent. According to the company, the market (business) has started showing signs of recovery. Analysts at Motilal Oswal Securities estimate sales and net profit to grow between 14 per cent and 16 per cent each in FY18 and FY19.

Investors, however, need to be cautious of the steep valuations of the P&G stock, which, at ~8,068 a piece, trades at 60 times its FY17 earnings. Valuations are above the mid-point five-year price-to-earnings (PE) range of 40-70. The PE works out to be 44 based on its FY19 estimated earnings. In light of this, investors could await a correction for a better entry point.