IGI Logo

Here are the key takeaways from P&G Hygiene and Healthcare (PGHH)’s FY22 Annual Report:

* Healthcare segment drives growth: PGHH does not share segmental sales details in the quarterly results, and so, annual report is the only source for its segmental results. The Healthcare segment (34% of sales in FY22) was the key driver of sales for the year, growing by 12.3% YoY. This was despite its extremely high sales base (up 24.1% YoY in FY21), which had been partly aided by Covid-led usage of the Vicks range of products. All sub-segments viz ointments and creams, cough drops, and tablets grew in high single digits or double digits. The Feminine Hygiene segment (65% of sales in FY22) reported relatively muted growth at ~8% in FY22, on a base of 17% growth over the preceding year. There have been some changes in the accounting of various line items in the last two years; a more normalized number to look at would be FY20-FY22, which witnessed sales CAGR of ~13%, EBITDA CAGR of ~15% and Adj. PAT at ~14% CAGR. This was despite a sharp increase in ad-spends. When the ad spends normalize, earnings growth can be higher. 1QFY23 results (link), the first under the new CEO, indicates another spike in ad-spendsfor the time being.

* Ramping up category development: Since 1995, the Whisper school program has educated more than 30m girls across India on menstrual hygiene. In FY22, PGHH supported 50,000 schools, educating ~9.9m adolescent girls (the highest number on both counts in its history) on the importance of menstrual hygiene – despite the pandemic. This number exceeded its target set in FY21 of reaching over 8m girls annually over the subsequent three years. The company had also committed to doubling the program’s impact by covering 50m girls within the next few years and is well on track to do the same. This initiative is an important part of category development by PGHH, the category leader in the Feminine Hygiene segment, with penetration levels of ~20% in India. We, however, believe that the pace of conversion from cloth to sanitary napkins could be negatively affected in the near term, owing to the prevailing high CPI inflation and cut down in new consumption avenues. This conversion has been a key driver of sales growth in the category.

* 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 (62% of healthcare sales), cough drops (31%), 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. Innovations in Vicks during the year included (1) Vicks Roll-On Inhaler and, (2) Vicks Xtra Strong. FY22 was also the first year where the company has ventured into piloting the launch of a cough syrup - Vicks Tulsi Ginger Cough Syrup. The management did not comment on feminine hygiene market share in the annual report.

* Improvement in margins: Adjusted for the sale of raw material of INR1.1b (to related party) from revenue and COGS (which would have marginally diluted the margin), EBITDA margin improved 230bp YoY to 21.8%. Two/three year CAGR stood at 15.5%/10.9%.

* After a huge spike up in ad spends, it moderated in FY22: The company has been aggressively spending on its branding since FY18 and it has been 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 further to 14.6% of sales in FY21, in line with P&G’s global strategy to boost ad spends during the pandemic. FY22 witnessed relatively lower ad-spends at 12.4% of sales. We believe ad spends are likely to normalize at 11–12% of sales in the medium term, driving earnings growth. However, 1QFY23 results, the first under the new CEO, indicate a near-term spike up in ad spends.

* Sustainability efforts: On the sustainability front, P&G globally has put forth a new ambition to achieve net-zero greenhouse gas (GHG) emissions across its operations and supply chain, from raw material to retailer, by the year 2040. In FY22, the P&G Group in India achieved ‘plastic packaging waste neutrality’ as it collected, processed, and recycled over 19,000 MT post-consumer plastic packaging waste from across the country, which is more than the amount of plastic packaging in its products sold during the year. In the last five years, the Group has reduced the usage of packaging material by more than 5000 MT.

 *Dividend: In FY22, the Board of Directors declared an interim dividend of INR95 per share. The payment of the said interim dividend was completed on 25th Feb’22. A final dividend of INR65 per share has been declared and is subject to the approval of the members at the ensuing 58th Annual General Meeting.

* AGM: The 58th Annual General Meeting of the company is to be held on Tuesday, 15h Nov’22 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. Over the next three years, the company experienced a lull period due to its overt focus on margins at the cost of growth. However, since FY19, the company has bounced back strongly (barring a temporary blip in FY20 due to Covid-related disruptions). With two-year sales CAGR at 15.5% in FY22, PGHH appeared to have returned to the growth levels seen in the earlier half of the decade. Near-term sales growth could however be negatively affected by weak consumer sentiments and the pace of conversion from cloth to sanitary napkins also slows down during periods of high inflation levels.

* Efforts in distribution expansion, significantly higher ad spends, new launches, and price cuts have boosted PGHH’s growth in recent years. 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 (64% of FY22 sales), owing to considerable moats and (2) potentially huge margin gains from premiumization in Feminine Hygiene over the longer term.

* Rich valuations of 51xFY24 EPS cap the stock’s upside potential from a one-year perspective. We reiterate our Neutral rating on the stock.

To Read Complete Report & Disclaimer Click Here

For More Motilal Oswal Securities Ltd Disclaimer http://www.motilaloswal.com/MOSLdisclaimer/disclaimer.html SEBI Registration number is INH000000412

Above views are of the author and not of the website kindly read disclaimer