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Strong broad-based topline growth; ad spends to stabilize at lower levels

Here are the key takeaways from P&G Hygiene and Healthcare (PGHH)’s FY21 Annual Report:

* Feminine Hygiene and Healthcare segments report strong growth: PGHH continued to strengthen its brand fundamentals with innovation, product launches, distribution expansion, and superior communication and execution. Sales grew 19.1% YoY in FY21, led by the Feminine Hygiene (66% of sales; up 16.7% YoY) and Healthcare (33.1% of sales; up 24.1% YoY) segments. The company does not share segmental data as a part of its quarterly results.

* Ramping up category development: Since 1995, the Whisper school program has educated more than 25m girls across India on menstrual hygiene. PGHH supported 40,000 schools, educating ~6m adolescent girls on the importance of menstrual hygiene in FY21 – despite the pandemic – via digital means. It plans to reach over 8m girls annually within the next three years. The company is committed to doubling the program’s impact by covering 50m girls within the next few years. This initiative is an important part of category development by PGHH, the category leader in the Feminine Hygiene segment, which has penetration levels of just ~20% in India.

* Vicks continues to gain market share in each of its sub-segments: PGHH continued to gain share in the Cough & Cold category, with strong offtake growth across sub-brands in the portfolio – VapoRub and BabyRub (61% of healthcare sales), cough drops (32%), and tablets (7%). Growth was driven by a) a superior go-to-market strategy, with an enhanced presence in stores with more visibility touchpoints per store, b) increased market share in the Cough & Cold category, and c) innovation backed by strong communication campaigns.

* Gross margin increases sharply: Some years ago, PGHH outsourced the manufacturing of its Vicks products to P&G’s other entities. This has led to lower material costs, but subsequently higher processing charges. We believe this is a key factor that has largely contributed to the reduction in RM costs (32.4% of sales in FY21 from 36.9%/42% in FY20/FY19) for the company in recent years.

* Investments in higher ad spend in line with P&G’s global strategy: The company’s aggression in branding since FY18 was ramped up further in FY21. The company increased ad spending in FY18 and FY19 (10.6% of sales for both years). This continued in FY20 (10.9% of sales) and increased even further to 14.6% of sales in FY21, in line with P&G’s global strategy to boost ad spends during the pandemic. We believe ad spends are likely to normalize at 11–12% of sales in subsequent years.

* Sustainability efforts: On the sustainability front, PGHH is working towards reducing greenhouse emissions at its manufacturing sites. It aims to achieve half of 2010 levels by 2030, in line with P&G’s global directive for the group. It has also initiated efforts to reduce the flow of plastic by recovering and recycling multi-layered plastic packaging waste.

* Dividend: In FY21, the Board of Directors declared an interim special dividend of INR150 per share, in addition to the interim/final dividends of INR85/INR80 per share. The dividend payout was over 200% in FY21. We believe intermittent special dividends in subsequent years will be an ongoing feature of the company – as it does not need the cash balance for expansion, and these payouts would only serve to improve RoCE and RoE.

* AGM: The 57th Annual General Meeting of the company is to be held on Wednesday, 17th Nov’21 at 11:00 am through video conferencing.

Valuation and view

* PGHH delivered strong sales growth in the first half of the decade, with a 20.4% CAGR over FY10–15. The company saw a lull period over the next three years due to overhauls such as demonetization and the introduction of GST. However, since FY19, growth seems to have returned strongly (barring a temporary blip in FY20 due to COVID-related disruptions). With 19% sales growth delivered in FY21, PGHH appears to have returned to the growth levels seen in the earlier half of the decade.

* Efforts in distribution expansion, significantly higher ad spends, new launches, and price cuts have boosted PGHH’s growth in recent years. Although expensive valuations of 50.1x FY23E EPS imply a limited near-term upside, two factors make PGHH an attractive long-term core holding: (1) the potential for huge category and market share growth in the Feminine Hygiene segment (66% of FY21 sales) owing to considerable moats and (2) potentially huge margin gains from premiumization in Feminine Hygiene over the longer term.

* The company should see rapid growth over the long term on the back of certain encouraging developments: (a) the increasing pace of distribution expansion, (b) the continuingly strong pace of category development efforts in schools to boost awareness and growth, (c) rising ad spends after a lull in preceding years, (d) a healthy pipeline of new products, (e) accelerated consumer entries into the category through launches at low price points, and (f) the willingness to take price cuts, whenever required, to boost growth. We maintain a Buy rating, with TP of INR17,450 (50x Dec’23 EPS).

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