Proctor and Gamble

Valuations for the P&G Hygiene and Healthcare stock (P&G Hygiene) have soared to a record high due to its recent price gains (currently at Rs 2,299), making it one of the most expensive FMCG stocks to own today. Investors should take this opportunity to book profits in the stock and exit their holdings.

Though rumours of the launch of P&G's global toothpaste brand, Crest, seem to have propelled the stock, there is no official confirmation of this (the Crest launch has made periodical news for many years now). And even if the Crest launch is finally on the cards, it appears unlikely that the launch will be routed through P&G Hygiene.

At the current price-earnings multiple of 36 times the trailing 12-month earnings, P&G Hygiene trades at a good premium to the much larger Hindustan Unilever (28 times) and on a par with Nestle India (36 times) and Dabur India (35 times).

The price discounts FY-11 estimates by a stiff 29 times. Such valuations appear unjustified for P&G Hygiene, given its relatively small size (the company's sales amount to just 4 per cent of HUL's and 15 per cent of Nestle India's annual sales) and its narrow product portfolio.

Premium valuations for companies such as HUL, Nestle or Dabur are backed by their presence across five-10 product categories with scores of brands.

The rationale for this is that a wide portfolio allows these players room to substantially scale up in size, economise on costs and weather a slowdown better than smaller rivals.

P&G Hygiene's is essentially a two-product portfolio comprising just of key brands — Vicks and Whisper (these have a number of extensions).

Expansion of P&G's portfolio beyond these brands, which would hold the key to better valuations, has not made much headway in the last several years.

Not a good fit

The US FMCG giant, Procter and Gamble US, operates through three separate arms in the Indian market (the 100 per cent owned P&G Home Products, the 70 per cent owned P&G Hygiene and Gillette India) and the areas of focus for the three companies have been clearly demarcated.

P&G Home Products holds and markets the entire portfolio of personal care and laundry brands (Ariel, Tide, Pantene, Head and Shoulders, Rejoice, Pampers, Olay) and Gillette India the entire range of male grooming and oral care brands (Gillette, Mach3, VectorPlus, Oral B).

The listed P&G Hygiene has been narrowly focussed only on feminine hygiene products under the umbrella of Whisper and healthcare under the Vicks franchise.

All product launches by the company in the past five years have been extensions and variants of these two key bread-and-butter brands. P&G Hygiene has, moreover, made several strategic moves over the past five years to obtain sharper focus just on these categories — businesses such as contract manufacturing of detergents have been hived off to the unlisted entity.

Given this backdrop, it appears quite unlikely that the Crest launch will be routed through P&G Hygiene, when both Gillette India (which already has a presence in oral care) and P&G Home Products (which houses personal products like shampoos) may offer a superior fit with the brand.

High growth

P&G Hygiene has, however, managed robust growth rates both in its sales and profits, merely by focussing on its existing product portfolio and regularly churning out new variants and brand extensions.

Recovering from the blip in revenues caused by the hiving off of the contract manufacturing business, the company's net sales have expanded at over a 20 per cent compounded annual rate and net profits at a 38 per cent rate over the past three years. Operating profit margins too have received a lift from 28 to 31 per cent over the same period.

With the underpenetrated feminine hygiene category consistently managing a near 25 per cent growth rate and bettering the healthcare segment (the Vicks franchise has seen growth rates of 5-14 per cent annually), the product mix has tilted towards hygiene products.

Given that P&G Hygiene occupies the premium end of this highly promising category, this has aided profit margins; the company's clear market leadership in its chosen segments too have helped.

From here on, while the Vicks portfolio may manage low double-digit growth, the Whisper franchise may sustain high growth rates, given the immense scope for improving the brand's penetration through distribution initiatives.

Making a serious dent in the mass market may, however, require the company to push its lower priced Whisper variants, which could entail a sacrifice on margins.

Risks

With the foreign promoter already holding 70.64 per cent in its equity, a possible delisting of this company at a later date cannot be ruled out; other FMCG multinationals have taken this route. Stagnant dividends (Rs.20-22 per share) and a fairly stiff royalty payment to its parent (5 per cent of net sales) are however, downsides to holding this stock.