IGI Logo

Weak result and uncertain pace of recovery lead to a rating downgrade

* P&G Hygiene and Healthcare (PGHH) declared a weak set of numbers in its 1QFY23 result (June year-end). PGHH reported flattish sales v/s our expectation of 11% growth. High CPI inflation appears to be severely affecting the conversion from cloth to sanitary napkins, the key driver of its sales growth. While the company does not share segmental data in its quarterly results, there may also have been a high base of Vicks sales in 1QFY22 because of the pandemic. Downtrading to cheaper SKUs in the feminine hygiene segment may also be a factor impacting sales adversely.

* While gross margin performance was better than expected and improved ~610bp sequentially, it contracted ~790bp YoY. This along with extremely high advertising expenses (14.9% of sales in 1QFY23 v/s 11.7% to 12.8% range in the preceding four quarters) led to ~29% YoY decline in EBITDA and PAT each during the quarter.

* While we remain positive on the long-term growth potential of the sanitary napkin and healthcare business, uncertain pace of recovery and challenging valuations of ~52xFY24E EPS lead us to downgrade the stock to Neutral.

Overall miss; sequential gross margin improvement the only silver lining

* PGHH’s 1QFY23 sales remained flat YoY at INR10.4b (est. INR11.7b).

* The sale of raw material worth INR20.9m has been adjusted from sales and COGS consequent to the change in business model of PGHH from toller to contract manufacturing.

* EBITDA/PBT/PAT declined 29%/30%/29.3% YoY to INR2,140m/INR2,058m/ INR1,544m (est. of INR2,861b/2,818b/2,108m), respectively.

* Two-year sales CAGR remained flat (+1.6%) while that of EBITDA/PAT came in at -3.4%/-5.1%.

* Gross margin contracted 790bp YoY to 58.6%. However, it expanded 610bp QoQ (est. 55.0%).

* As a percentage of sales, lower other expenses (-280bp YoY to 18.3%), stable employee expenses (-40bp YoY to 4.9%) and higher ad-spends (+330bp YoY to 5.6%) led to 800bp contraction in EBITDA margin to 20.5% (est. of 24.4%) in 1QFY23.

Valuation and view

* Changes to our model have resulted in 21%/9% cut in FY23E/FY24E EPS because of weaker-than-expected results, likely delayed recovery in sales amid high CPI inflation and a spike in near-term ad-spends, all of which are likely to impact earnings growth adversely. PGHH’s relatively more urban skew compared to other staples does not seem to be protecting it from sales growth impact in an inflationary environment. 

*  Two factors make PGHH an attractive long-term core holding: a) huge category growth potential in the Feminine Hygiene segment (~64% of FY22 sales), coupled with potential for market share gains aided by considerable moats, and b) the potential for higher margin gains from premiumization in the Feminine Hygiene segment over the long term.

* Nevertheless, the uncertain pace of recovery and expensive valuations of 51.9xFY24E EPS lead us to downgrade the stock to Neutral. We value the stock at 50x Sep’24E EPS arriving at our TP of 14,250.

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