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In-line revenue; cost surge shrinks margin

* P&G Hygiene and Healthcare (PGHH) delivered sales growth of 10% in 4QFY24 (FY ending June), in line with our expectation. This growth was led by product-price mix, premiumization, and growth in the feminine hygiene category. The last four/five-year CAGR was at 10%/8%.

* Gross margin expanded 160bp YoY but contracted sharply by 710bp QoQ to 59.2% (est. 65.3%). Ad spending jumped 187% YoY (16.5% of sales). EBITDA fell 38% YoY to INR1.3b (est. INR2.7b). EBITDA margin contracted sharply by 1,080bp YoY and 1,160bp QoQ to 14.1%, which stood at a 12-quarter low.

* With a portfolio of essentials and healthcare, the company remains focused on product innovation-led customer acquisition. Penetration play would continue, but at a steady pace, despite the high scope of user additions. The stock trades at an expensive valuation of 62x/54x FY25E/ FY26E P/E. We reiterate Neutral rating on the stock. In-line sales; miss on margin

* Double-digit sales growth: Sales rose 10% YoY to INR9.3b (est. INR9.6b), led by product innovation, premiumisation and category growth in feminine hygiene. PGHH posted 8% growth in FY24 and a 7% CAGR in FY19-FY24.

* Poor margin performance: Gross margin expanded 160bp YoY but declined sharply by 710bp QoQ to 59.2% (est. 65.3%). Employee, A&P, and other expenses grew 40%, 187% and 13% YoY, respectively. As a percentage of sales, employee expenses increased 150bp YoY to 7.2%. Ad spending rose 1,020bp YoY to 16.5%, and other expenses grew 60bp YoY to 21.4%.

* Miss on earnings: EBITDA declined 38% YoY to INR1.3b (est. INR2.7b). EBITDA margin contracted 1,080bp YoY and 1,160bp QoQ to 14.1% (est. 27.7%), the lowest in 12 quarters. There is an exceptional item of INR130m for impairment of PPE. Adj. PAT declined by 39% YoY to INR908m.

* In FY24, sales/EBITDA/APAT grew by 8%/13%/25%.

* The board has declared a final dividend of INR95/share.

Valuation and view

* We cut our EPS estimates by 9%/6% for FY25/FY26.

* Two factors make PGHH an attractive long-term core holding: 1) robust growth potential in the feminine hygiene segment (65-68% mix of FY24 sales) and 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.

* With a portfolio of essentials and healthcare, PGHH focuses 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 expensive valuations of 62x/54x FY25E/FY26E P/E. We do not see any medium-term trigger. Reiterate Neutral with a TP of INR17,000 (55x Jun’26E EPS).

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