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Topline momentum healthy; increase in ad spends affects quarterly margin

* P&G Hygiene and Healthcare (PGHH) ended FY21 (June year-end company) with 19.1% sales growth – this is the second year in the preceding three years that it has reported topline growth of over 19%. Thus, after losing momentum in the three years between FY16 and FY18, after the CEO change, the company seems to be back at the 19–20% topline CAGR trajectory seen over FY08–15. For a non-discretionary company, this is very strong topline momentum. With only ~20% penetration in feminine hygiene products (~67% of PGHH FY20 sales), coupled with dominant market leadership and considerable moats, the growth opportunity remains immense.

* 4QFY21 saw revival in sales momentum (+24% YoY), following a small blip in 3QFY21, after strong growth in 1HYF21 (18.5% growth). Gross margins were also higher v/s expectations. However, advertising spends skyrocketed 4.7x YoY during the quarter, leading to the EBITDA and PAT misses. As a result of the very high ad spends in 4QFY21, ad spends as a percentage of sales were up to 14.6% in FY21 v/s 10.9% in FY20.

* Operating leverage, led by healthy sales growth and the relative normalization of ad spends, is likely to lead to healthy margin improvement going forward. This would bolster earnings growth in what is an already strong topline growth story. Maintain Buy.

Sales beat; profitability lower than expected due to higher brand investments

* Sales in 4QFY21 grew 24% YoY to INR7.9b (est. INR7.1b), with EBITDA declining 32.1% YoY to INR749m (est. INR1.2b), PBT declining 36.3% YoY to INR672m (est. INR1.1b), and adj. PAT declining 29.2% YoY to INR490m (est. INR837m).

* Gross margins expanded 520bp YoY to 68% (est. 62.8%).

* Ad spends grew sharply (372.5% YoY) to INR1.9b, employee expenses 9.9% YoY to INR419m, and other expenses 7.1% YoY to INR2.2b.

* As a percentage of sales, ad spends grew 1,820bp YoY to 24.7%, while employee costs declined 70bp YoY to 5.3% and other expenses were down 450bp YoY to 28.5%. This led to a 790bp contraction in EBITDA margins to 9.5% (est. 16.3%) in 4QFY21. We highlight that ad spends to sales over the last three years have been at 10–11%.

* FY21 sales / EBITDA (adjusted) / adj. PAT grew 19.1%/12.2%/13.2% YoY.

* Average inventory/debtor days in FY21 were lower by two/five days YoY, coming in at 23/16 days. Creditor days remained flat at 66 days. Average net working capital days improved by seven days to -27 days in FY21.

Highlights from management commentary

* The Feminine Care and Healthcare businesses recorded double-digit growth, outperforming the industry in FY21.

* The company has declared a final dividend of INR80/share. Factoring in the interim dividend of INR85/share and special dividend of INR150/share announced in 2QFY21 and 3QFY21 respectively, the total dividend for the full year was INR315/share.

* Notably, the company had also declared a special interim dividend of INR362/share in FY17. We believe special dividends would be an intermittent feature of the company going forward.

* The strategy to focus on superiority and productivity, enabled by the resilience and agility of the organization, is helping PGHH deliver balanced growth.

Valuation and view

* There is no significant change to our FY22E/FY23E EPS estimate.

* Two factors make PGHH an attractive long-term core holding: a) huge category growth potential in the Feminine Hygiene segment (~67% of FY20 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.

* While valuations at 44.3x FY23E EPS are in line with staples peers, PGHH has a stronger topline and earnings track record, best-of-breed structural earnings growth potential, and strongly improving RoEs that deserve premium multiples. We maintain our BUY rating, with TP of INR15,530/share (targeting 50x Sep’23E EPS).

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