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In-line revenue; beat on margin

* P&G Hygiene and Healthcare (PGHH) delivered 10% YoY sales growth to INR12.5b (in-line) in 2QFY25 (FY ending June). The last three-year CAGR was 4% for the quarter and FY24 growth was 7.5%.

* Gross margin expanded 460bp YoY/190bp QoQ to 64.8% (est. 63%). Gross profit was up by 18% YoY. Ad spends were up by 25% YoY (12.7% of sales). EBITDA grew 20% YoY to INR3.7b (est. INR3.4b). EBITDA margin expanded 240bp YoY and 410bp QoQ to 29.7% (est. 27.8%).

* With a portfolio of essentials and healthcare, the company has remained focused on customer acquisition through product innovation. Penetration play will continue but at a steady pace, despite the high scope of user additions. The stock trades at a rich valuation of 55x/50x FY25E/ FY26E P/E. We reiterate our Neutral rating on the stock.

In-line revenue

* Healthy sales growth: PGHH reported 10% sales growth YoY to INR12.5b (est. INR12.4b) on a favorable base (flat in 3QFY24). Quarter revenue growth has always been volatile for the company.

* Strong margin performance: Gross margin expanded 460bp YoY and 190bp QoQ to 64.8% (est. 63%). Employee cost was up 21% YoY, A&P was up 25% YoY, and other expenses were up 11% YoY. EBITDA margin expanded 240bp YoY and 410bp QoQ to 29.7% (est. 27.8%).

* Double-digit profitability growth: EBITDA grew 20% YoY to INR3.7b (est. INR3.4b). PBT grew 18% YoY to INR3.6b (est. INR3.4b). Adj. PAT grew 17% YoY to INR2.7b. (est. INR2.6b)

Valuation and view

* We maintain our EPS estimates for FY25/FY26.

* Two factors make PGHH an attractive long-term core holding: 1) high growth potential for the feminine hygiene segment (65-68% mix of FY24 sales), coupled with the potential for market share gains, aided by strategic initiatives, including the fortification of significant market advantages; and 2) potential to sustain high operating margin from the long-term trend of premiumization in the feminine hygiene segment.

* With a portfolio of essentials and healthcare, PGHH has remained focused on customer acquisition through product innovation. Penetration play will continue but at a stable pace, despite the high scope of user additions. The stock trades at rich valuations of 55x/50x FY25E/ FY26E P/E. Further, we do not see any medium-term trigger. Reiterate Neutral with a TP of INR15,500, based on 50xDec’26E EPS.

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