Procter and Gamble

Procter and Gamble

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.

House Chitter Chatter - May 29 2007

UBS on Suzlon Energy

We estimate the payment over three years of the estimated acquisition cost of Rs52bn would enable Suzlon Energy (SUEL) to sustain its ROIC over next three years even after Suzlon's estimated capex of Rs36bn over 2008-10E. This is despite, at full acquisition cost, the acquisition could yield a 7.1% EBITDA ROIC in FY09E and 11.6% in FY10E.

We increase our price target from Rs1,100 (on 18x FY09E EPS) to Rs1,250 (which is based on 19x our 12m forward EPS), to reflect a 5% discount to BHEL's price target. We maintain our Reduce 2 rating.


SSKI on IVRCL

IVRCL's 4QFY07 net profit was above our estimates at Rs732mn (+67% yoy) primarily due to higher than estimated revenues and operating margins. The operating margins expanded by 140bps to 10.8% during the quarter led by execution of higher margin orders during the quarter. Moreover, IVRCL has provided tax during FY07 accounting for 80IA tax benefits mainly to preserve its claims with IT Tribunal. We have upgraded 8.8% and by 6.6% for FY08 and FY09 respectively (after factoring a tax rate of 34%) led by higher than estimated operating margins. Going forward, IVRCL is planning to unlock value in its real estate business by listing the real estate subsidiary (IVR Prime- IPUD) over the next 2 months. We have valued the 2300 acres land bank of IVRCL¿s 80% subsidiary IPUD at Rs168/share. The stock is currently trading at 9.9x on FY09E earnings (adjusted for BOT, real estate and HDOL value of Rs201/share). We believe the stock is attractively valued considering its strong order book, healthy balance sheet and strong earnings growth coupled with the likely trigger of value unlocking in its real estate business. We maintain our Outperformer rating on the stock.

SSKI on Nagarjuna Constructions

Nagarjuna Construction Company (NCC) reported 4QFY07 results higher than our estimates led by higher than estimated other income and lower tax rate. Revenues grew by 36% yoy to Rs8.7bn, while operating margins improved marginally by 10bps to 8.4% during the quarter led by higher margin real estate division revenues. As a
result, net profit grew by 43% yoy to Rs499mn in 4QFY07. The order backlog grew by 34% yoy to Rs73bn driven by order booking of Rs11.4bn (+4% yoy) during the quarter. However, we have downgraded our earnings estimate by 2% and 4% for FY08 and FY09 respectively led by lower than estimated operating margins. The stock is currently trading at 10.9x FY09E earnings (net of BOT and real estate valuation of Rs41/share), which we believe is attractive considering its strong order book and resultant visibility of strong earnings growth over FY07-09. We maintain our Outperformer rating on the stock.

SSKI on Unitech

Unitech reported a 308% yoy growth in Q4FY07 standalone revenues to Rs8.5bn, marginally below estimates. EBITDA increased by 766% yoy to Rs5.1bn, led by strong realisations in the company's key markets in the NCR. Consequently, EBITDA margins improved to 60.1% in the current quarter from 28.3% in Q4FY06. For FY07, Unitech reported a 168% yoy growth in consolidated revenues to Rs32.8bn, driven by strong realisations across key markets like NCR and Kolkata. The strong realisations and sale of stake in IT parks to Unitech Corporate Parks also resulted in a strong 1087% yoy growth in EBITDA to Rs20bn. We are not changing our FY08 earnings estimates and expect Unitech's profits to rise by 118%yoy to Rs27.4bn. We like Unitech's strategy of pan India presence, focus on residential development and outright sale / exit from non-residential properties, which improves its capital utilisation and enables it to grow its land bank rapidly. We maintain our Outperformer rating on the stock.

SSKI on Jain Irrigation

Taking a big leap in its pursuit to increase presence in the key MIS markets globally (India, US, Israel and Africa), Jain Irrigation has acquired majority stake (50% + 1 share) in Israel based irrigation company - NaanDan for US $ 21.5m. This is the largest acquisition by Jain Irrigation. NaanDan (a co-operative) enjoys a strong equity in the Israel market and does revenue of around US $ 75m annually. We see immense merit in the deal, as JISL gets a foothold into one of the largest MIS markets (Israel), opportunity to introduce its sprinklers systems in Israel, access to NaanDan's manufacturing and distribution network in USA, Africa, Europe, Latin America and Australia and attractive valuations of less than 0.6x revenues (Plastro, Israel was sold at 1x revenues to John Deere). We continue to maintain our positive stance on JISL, given the high growth traction in the existing operations and appetite to operate in global market through inorganic route. Reiterate Outperformer.


SSKI on HDFC

HDFC has announced a preferential allotment of 18m equity shares at Rs1,730 per share (aggregating Rs31.14bn) to the Carlyle group and Citigroup Strategic Holdings Mauritius Ltd . Post the transaction, Carlyle would own a 5.6% stake in HDFC while Citigroup's holding would be maintained at 12.3%. The capital is being raised primarily to finance the rapid expansion of HDFC Bank and HDFC Standard Life Insurance Company. To factor in the equity dilution, we are downgrading our EPS estimates for HDFC by 4.2% and 3.8% for FY08 and FY09 respectively (while upgrading profit estimates by ~ 3% for FY08 and FY09). Considering the significant infusion in the life insurance venture, we are revising our value of life insurance subsidiary from Rs273 per share for FY09 to Rs297 per share. Adjusting for the strategic investment valuation of Rs570 per share for FY09, the stock is available at 2.75x FY09E adjusted book value (diluted basis). We reiterate Outperformer with a revised price target of Rs2,200 after factoring in the impact of equity dilution.

Motilal Oswal on United Spirits

We estimate that Whyte & MacKay will contribute £0.6m (before exceptional one-time costs of £7m-£10m) and £13m to the consolidated profits after interest payments in FY08 and FY09 respectively. We expect United Spirits to pay back debt taken in the SPV up to £200m from the sale of treasury stock after the merger of Shaw Wallace which can result in profits and EPS being higher than our estimates. We maintain Buy.

Motilal Oswal on PNB

While higher delinquencies is concerning and would require higher provisions going forward, a high CASA of 46%, would result in stable margins for PNB. Growing fee income at a strong rate is commendable. Going forward, we expect consistent trend in NII coupled with a lower risk on the bond portfolio. The stock trades at 1.2x FY09E BV and 6.7x FY09E EPS. Maintain Buy.

Man Financial maintains Neutral on BPCL

Citigroup on Nifty

The index opened on a strong note but was unable to hold onto its opening trade gains. It posted an intra-day high at 4296 then drifted down through the entire trading session to end the day up 5 points.

The index has support around the 10dma at 4222 and 4200 -(62% retracement of the past two trading sessions' gains from a low of 4141 to a high of 4296. Intra-day dips should find support in the 4222- 4200 band.

The index faces resistance at 4291 (high of 23 May 07),while consolidation in the 4291 and 4200 band can be expected until it1 remains below 4291 on a closing basis.

Expect intra-day range-bound movement in the 4191-4222 band.


EQM on P&G

At the current price of Rs 760, the stock trades at a price-to-earnings multiple of 18.4 times its trailing 12-month earnings. Capitalizing on the opportunity existing in the hygiene segment, PGHH is likely to benefit from the same going forward. It is now a focused two-product company, with both these brands in the lifestyle segment. The move to divest the low margin segment of contract manufacturing has also paid off and will contribute to the margin expansion. However, increasing competition will continue to remain a cause for concern.

EQM on ITC

At the current price of Rs 168, the stock is trading at a price to earnings multiple of 23.4 times its 12-months trailing earnings. The strong performance of the non-cigarette business is positive for the company. With duties on cigarettes increasing, the volumes could be impacted to a certain extent. Hence, lower dependence on this segment would benefit the company in the long term. We derive comfort from the fact that the company has been able to run its other businesses rather successfully and are positive on the company from a long-term perspective. Valuations from a medium term perspective though, look stretched.


Geojit on Usha Martin

At current market price of Rs. 244.75, the share (Rs. 5/- paid up) is trading at 9.3 times FY 2007 consolidated EPS of Rs. 26.3 and 6.2 times FY 2008 expected consolidated earnings of Rs. 40/-; Company¿s earnings will receive major boost with progress / completion of above expansion plans. In view of excellent prospects, we recommend to 'BUY' the share at CMP.

KRC - Between the Lines - Proctor and Gamble

KRC - Between the Lines - Proctor and Gamble

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