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Stellar performance continues; upgrade to Buy

* For the second consecutive quarter, PGHH reported an 18.5% YoY topline growth. If one takes into account flattish sales growth in 4QFY20 (June quarter, when most peers posted a sharp sales decline), it has been three quarters of impressive topline performance. Unlike 1QFY21, when growth was led largely by the Feminine Hygiene segment, performance in 2Q was broad based with Feminine Hygiene and Healthcare posting strong doubledigit growth. Margin performance was equally impressive with a 350bp adjusted EBITDA margin improvement, led primarily by strong sales growth.

* As indicated in our AR note, initiatives in the last 2.5 years on distribution expansion, higher ad spends, increased intensity of category development efforts in schools, new launches, and price cuts have led to strong topline growth, despite the fact that growth in the last two quarters of FY20 was impacted by COVID, it being a June year-end company. Led by 18.5% topline growth in 1HFY21 and reaping the benefits of the above growth measures, like-to-like EBITDA growth is even more impressive at 32% YoY in 1HFY21.

* While we have had a constructive view on the immense structural growth opportunity, modest earnings growth in the past three years, and expensive near-term valuations had led us to maintain a Neutral rating since our downgrade in Aug’17. Changes to the model, following the stellar results of the past two quarters, have meant that valuations at 48.7x/40.5x FY22E/FY23E EPS appear attractive, particularly for a business that has: a) a long runway for growth with strong moats, and b) RoEs of over 50%. Upgrade to BUY.

Sales in line; margin higher than our expectation

* Sales in 2QFY21 grew 18.5% YoY to INR10.2b (v/s our estimate of INR10b), with EBITDA (adjusted) growing 37.5% YoY to INR2.6b (v/s our expectation of INR2.1b). PBT (adjusted) increased 38.5% YoY to INR2.5b (v/s our estimate of INR2.1b), and adjusted. PAT grew 34% to INR1.8b (v/s our expectation of INR1.6b).

* Reported EBITDA/PAT rose 83.4%/84% YoY to INR3.4b/INR2.5b. Reported EBITDA margin expanded 1,190bp to 33.6%.

* While the management has not provided specifics on one-time items, they guided that adjusted PAT growth was ~34%. We have made adjustments to the reported figures of 2QFY21 based on our assumptions.

* Ad spends remained flat YoY at INR1.1b, employee expenses declined 3.6% to INR414m, whereas other expenses (adjusted) rose 49.1% to INR3b.

* Gross margin expanded 670bp YoY to 69.3% (v/s our estimate of 61%).

* As a percentage of sales, ad spends/employee costs declined 190bp/90bp YoY to 10.7%/4.1%, while other expenses (adjusted) rose 600bp YoY to 29.4%, leading to a 350bp expansion in EBITDA margin to 25.2% (v/s our expectation of 21.4%) in 2QFY21.

Highlights from the Balance Sheet

* There was an 80% YoY increase in negative net working capital as creditors were up 20%, while inventory declined 5% and debtors were flattish (up 2.6% YoY).

* Cash and cash equivalents were up 67% YoY to INR 12.7b. Of this, the company announced INR2.8b (INR85/share) to be paid as interim dividend.

* Cash flow from operations rose significantly (130% YoY) to INR7b in 1HFY21.

Highlights from the management commentary

* In the management’s estimate, PAT, excluding one-time items, in 2QFY21 was up ~34%.

* Feminine Care and Healthcare businesses delivered strong double-digit growth in 2QFY21, ahead of category growth, thereby gaining market share.

* The company has declared an interim dividend of INR85 per equity share of INR10 each.

* PGHH continues to focus on superior execution, improving productivity, leading constructive disruption, and strengthening its organization and culture as the market recovers.

* The strategies mentioned above have enabled PGHH to deliver consistent results, despite a challenging environment, thus proving that these strategies will deliver balanced growth over the long-term.

Valuation and view

* Changes to the model have led to an increase in our FY22E/FY23E EPS growth forecast by ~7%. It is now evident that topline momentum is here to stay and the base of sales growth is far less challenging in the remaining two quarters of FY21.

* As highlighted in our annual report note released in Nov’20: a) increasing pace of distribution expansion, b) strong pace of category development efforts in schools to boost awareness and growth, c) rising ad spends after a lull in preceding years, d) healthy pipeline of new products, e) hastening consumer entry into the category through launches at low price points, and f) willingness to take price cuts, whenever required, to boost growth are all encouraging developments that should aid rapid growth for the company over the long term.

* Two factors make PGHH an attractive long-term core holding: a) huge category growth potential in the Feminine Hygiene segment (~67% of sales), coupled with potential for market share gains due to considerable moats, and b) potential for higher margin gains from premiumization in the Feminine Hygiene segment over the long term. With the return of strong topline and earnings momentum and among the best of breed RoEs of over 50%, valuations look attractive at 48.7x/40.5x FY22E/FY23E EPS. Upgrade to Buy with a TP of INR 14,000/share (targeting 50x FY23E EPS).

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