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Commodity pressures hurt margins

* While the sales decline of 3.7% YoY in 4QFY22 (adjusted for a one-off in other operating income) was optically poor, it was on an unusually high base of Vicks sales in FY21 (24.1%) that may have been especially strong in 4QFY21 given the second wave of Covid-19. Even so, the two-year sales CAGR, which has been in the 12-17% range in the preceding three quarters, stood at only 9.2% in 4QFY22.

* As a percentage of sales, PGHH’s ad spends declined sharply by 1,190bp YoY to 12.8% from the unusually high levels of 4QFY21. In fact, A&P spends moderated in FY22 to 12.4% of sales v/s 14.1% in FY21, which was when P&G chose to increase its ad spends globally rather than curtail marketing spends amid the pandemic. We believe A&P will continue to decline, reaching the 10-11% of sales level going forward.

* The company has strong earnings growth potential, led by a healthy revenue growth and gradual normalization of the unusually high ad spends in the aftermath of the pandemic as well as the ongoing material cost pressures. We maintain our BUY rating.

Overall miss on our estimates

* PGHH’s sales declined 3.7% YoY to INR7.6b in 4QFY22 (est. INR8.5b). Adjusted EBITDA/PBT/PAT declined 10.4%/14.2%/13.1% YoY to INR671m/INR577m/INR426m (est. INR1.2b/1.2b/937m), respectively.

* Two-year sales/EBITDA/PAT (adjusted) CAGR came in at 9.2%/-22%/-21.6%, respectively.

* Gross margin contracted 1,560bp YoY to 52.5% (est. 64.4%).

* As a percentage of sales, lower ad spends (-1,190bp YoY to 12.8%), adjusted other expenses (-330bp YoY to 25.2%), and higher employee costs (+30bp YoY to 5.6%) led to a 70bp contraction in adjusted EBITDA margin to 8.9% (est. 14.3%) in 4QFY22.

* Adjusted sales/EBITDA/PAT grew 6.3%/19%/15.6% YoY in FY22, respectively.

* The company has declared a final dividend of INR65 per share. It had declared an interim dividend of INR95 per share taking the total dividend for FY22 to INR160 representing a payout of 88.7%.

Highlights from the management commentary

 * Highlights from the management commentary

* PGHH reported a one-time other income from the intercompany sale of inventory in 4QFY22 similar to that in 3QFY22.

* The management attributed the decline in profitability primarily to commodities inflation even as this was offset by cost rationalization and price hikes in FY22.

* It also highlighted that the operating environment continues to be marked by unprecedented headwinds and commodity fluctuations in the near-term.

* Innovations during the year included Whisper Choice Nights, Vicks Roll-On Inhaler, Vicks Xtra Strong and Vicks Tulsi Ginger Cough Syrup.

* Whisper’s ‘Menstrual Health & Hygiene Program’ supported over 50,000 schools and reached about 10m adolescent girls in FY22.

Valuation and view

* The miss on our forecasts drives us to cut our EPS estimates for FY23/FY24 by 11.4%/6.6%, respectively.

* With a full-year dividend of INR160 per share, dividend payout remains high at nearly 90% of EPS in FY22. Consequently, FY22 RoE and RoCE remain healthy at 80.7% and 86.7%, respectively.

* Two factors make PGHH an attractive long-term core holding: a) huge category growth potential in the Feminine Hygiene segment (~66% of FY21 sales), coupled with potential for market share gains backed by considerable moats, and b) the potential for higher margin gains from premiumization in the Feminine Hygiene segment over the long term. * PGHH’s best-of-breed structural earnings growth potential and improving RoE deserve premium multiples. We maintain our BUY rating with a TP of INR16,500 (premised on 55x FY24E EPS).

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