Neutral P&G Hygiene and Healthcare Ltd For Target Rs.16,940 - Motilal Oswal
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Topline below our expectation; ad-spends mount sequentially
* PGHH reported high single-digit sales growth in 1QFY24 (ending in June), surpassing our initial double-digit growth expectations. PAT up 36% YoY driven by an increase in volume growth, a favorable product price-mix, and enhanced productivity.
* GP margin has been expanded 230bps, while operating margin expanded by 450 bps owing to the benefit of operating leverage. Ad-spends mounted sequentially to 13.5% of sales from 6.3% (albeit, declined 140bp YoY) during the quarter.
* The company continues to grow with strong product portfolio of sanitary napkins and healthcare business, superior consumer communications and stream of product innovations. With the challenging valuations of ~64.9xFY24E EPS/~54.4xFY25E EPS led us to maintain our Neutral rating on the stock.
Sales below expectations; operating margins in line
* PGHH’s 1QFY24 sales grew 9.2% YoY to INR11.4b (est. INR12.1b).
* EBITDA grew 33.1% YoY to INR2.8b (est. INR3.0b).
* PBT/Adj. PAT increased 38.2%/36.4% YoY to INR2.8b/INR2.1b (est. INR2.9b/ INR2.2b).
* Three-year Sales and EBITDA CAGR stood at 4.1%/7.5%. ? Gross margin expanded ~230bp YoY/310bp QoQ to 60.9% (est. 58.0%).
* As a percentage of sales, employee expenses increased 70bp YoY and remained flat QoQ at 5.6%. Ad-spends declined 140bp YoY to 13.5% and other expenses fell 150bp YoY to 16.8%. As a result, EBITDA margin expanded 450bp to 25% (est. 24.7%).
Valuation and view
* We are not making any material changes to our EPS estimates, given the volatility in ad-spends and possible delays in gross margin recovery due to higher inventory even amid pulp and oil costs volatility.
* Two factors make PGHH an attractive long-term core holding: 1) robust growth potential in the Feminine Hygiene segment (~65% of FY22 sales), coupled with the potential for market share gains aided by strategic initiatives, including the fortification of significant market advantages, and 2) potential for higher margin gains from the long-term trend of premiumization in the Feminine Hygiene segment.
* Nevertheless, the uncertain pace of sales and earnings recovery and expensive valuations of ~64.9xFY24E EPS/~54.4xFY25E EPS led us to maintain our Neutral rating on the stock with a TP of INR16,940 (based on 55xFY25E EPS).
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