VMS focus to the fore despite quarterly fluctuations
Q4FY20 (year ending June) revenues declined 13.9% YoY to | 201 crore due to temporary disruption of operations initially from the second fortnight of March amid Covid. EBITDA margins expanded 305 bps YoY to 26.4% due to better gross margins and lower other expenditure. EBITDA de-grew 2.7% YoY to | 53 crore. Net profit grew 10.8% YoY to | 49 crore. Delta vis-a-vis EBITDA was due to lower tax rate (12.3% vs. 28.3% in Q4FY19). Note: P&G Health (PGHL) has converted from calendar cycle to July-June financial year and reported 18 month’s numbers (January 2019-June 2020)
VMS power brands to drive growth amid increasing awareness
PGHL is a pharma cum consumer OTC player with strong and legacy brands in the vitamin minerals & supplement (VMS) category like Neurobion, Polybion, Evion (all vitamins), Livogen (iron supplement), Nasivion (nasal decongestant), Seven Seas (vitamin- substitute for malt based health drinks). Post the change in ownership (from Merck to P&G), we expect these known brands to leverage on P&G's distribution might as most of these brands are driven by self-medication habit rather than doctor's prescription. It also has a presence in the prescription based cardio-diabetology category. The company’s top five brands (Neurobion, Concor, Livogen, Polybion, Evion) together posted revenue CAGR of 7.4% (MAT June 16-20), leading their combined sales contribution to grow from 69% in June 2016 to nearly 78% in June 2020 (based on AIOCD sales). Going ahead, we expect increasing awareness and health consciousness amid the Covid pandemic to drive growth in the VMS segment.
Strong balance sheet, improving financials
PGHL is a cash-rich company and has seen its core RoEs (excluding cash) improving from 7.7% in CY14 to 29.0% in CY18. EBITDA margins have also improved significantly to 23.6% in adjusted FY20 (includes last four quarters) from the lows of 6.8% in CY14. P&G’s strong distribution channel and strong brand recall are likely catalysts for future growth. Core RoE is expected to improve to 67.4% by FY22E. The board has recently approved a dividend of | 230 (| 188: special + |42: final) for FY20.
Valuation & Outlook
While Q4FY20 revenues were impacted by Covid related challenges, PGHL has posted one of the best margin performances in the recent past leading to resilient profitability. Besides possessing MNC pharma traits like strong brand stickiness, growth, earnings visibility, consistency (despite quarterly fluctuations) in performances, strong b/s etc, the key differentiator for PGHL is that its core category is VMS, which, as a therapeutic category, is likely to be rediscovered amid the current pandemic. PGHL combines the best of P&G and legacy Merck’s consumer health capabilities and cultures. We upgrade from HOLD to BUY with a TP of | 6110 (44x FY22E EPS of | 138.8).
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