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Cost rationalization aids margin expansion

* P&G Hygiene and Healthcare (PGHH)’s 1QFY26 revenue was lower than our expectations, while its profitability beat our estimates. We have noted such a performance anomaly in the past quarters, too. PGHH posted a flat YoY revenue growth at INR9.4b (a miss) in 1QFY26 vs. ~10% growth in the base quarter. Revenue growth was weak in the last four quarters as well.

* Gross margin expanded 440bp YoY and 340bp QoQ to 63.6% (est. 61.9%). GM volatility between quarters has always been high. Employee costs dipped 28% YoY, and A&P spending was down 55% YoY, as PGHH had invested heavily on the A&P front last year. EBITDA doubled YoY to INR2.7b on a weak base. EBITDA margin surged 1,430bp YoY/730bp QoQ to 28.4% (est. 18.2%), much ahead of expectations. This was fueled by various cost rationalization initiatives undertaken by the company across parameters.

* PGHH is less predictable on a quarterly basis, but its annual performance remains highly stable. We model a 26.0-27.5% EBITDA margin during FY26- 28E, implying ~7% EBITDA CAGR during FY26-28E.

* The stock trades at rich valuations of 52x/47x FY26E/FY27E P/E. Reiterate Neutral with a TP of INR15,000 (based on 50x Jun’27E EPS).

Revenue remains flat while EBITDA margin surges

* Miss on revenue: PGHH’s sales were flat YoY at INR9.4b (est. INR9.9b), after posting a 1% dip in the preceding quarter and 9.7% growth in the base quarter. We have noted such a performance anomaly in the past quarters, too.

* Sharp margin expansion: Gross margin expanded 440bp YoY and 340bp QoQ to 63.6% (est. 61.9%). Employee costs dipped 28% YoY, and A&P spending was down 55% YoY, while other expenses rose 7% YoY. EBITDA margin surged 1,430bp YoY and 730bp QoQ to 28.4% (est. 18.2%).

* Beat on profitability: EBITDA doubled YoY to INR2.7b (est. INR1.8b). EBITDA grew on a weak base (-38% YoY in 4QFY24). Similarly, adj. PAT jumped 111% YoY to INR1.9b. (est. INR1.5b).

Valuation and view

* We broadly retain our EPS estimates for FY26/FY27.

* 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; this is aided by strategic initiatives, including the fortification of significant market advantages; and 2) the potential to sustain high operating margins from the long-term premiumization trend in the feminine hygiene segment.

* With a portfolio of essentials and healthcare, PGHH remained focused on product innovation-led customer acquisition. Penetration play would continue but at a stable pace, despite the high scope of user additions. The stock trades at rich valuations of 52x/47x FY26E/FY27E P/E. Further, we do not see any medium-term trigger. Reiterate Neutral with a TP of INR15,000, based on 50x Jun’27E EPS.

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