Procter & Gamble Hygiene and Health Care Limited is is engaged in the manufacturing and selling of branded fast-moving consumer goods in the feminine care and healthcare segments. The Company has a manufacturing plant in Goa and Baddi in Himachal Pradesh. They also have third-party manufacturing locations spread across India.
The company’s shares have 52 weeks price band of INR 12774-8400 and a total market capitalization of INR 357 billion which makes it a Large-Cap company. The shares have a P/E ratio of 84.5 and a dividend yield of 0.8%
Now, let’s take a deep dive into the fundamentals of the company.
The company will be evaluated on 10 categories and each would be given a rating out of 5 stars. From this, we will arrive at a combined stock rating for the company. As the ratings are based on long term past performance, they are relevant for at least 3 years in the future until FY 2022. The categories are as follows.
- Economic Moat
- Business Model and Management
- Growth Ratios
- Profitability Ratios
- Cash Flow Ratios
- Liquidity and Solvency Ratios
- Efficiency Ratios
- Valuation Ratios
- ROE (Du Pont Analysis)
- Future Prospects
(All units are INR Millions except ratios and per share data)
1.Economic Moat (★ ★ ★ ★ ☆)
The company operates in the FMCG sector and market dominance in such an industry is obtained through Scale, Branding and Distribution reach. P&G in India is mostly involved in manufacturing, trading and marketing of health and hygiene products which is still a highly under-penetrated market in India. It operates the brands like Ambi Pur, Ariel, Duracell, Gillette, Head & Shoulders, Olay, Oral-B, Pampers, Pantene, Tide, Vicks and Whisper. These all have a high top of the mind recall amongst Indian consumers.
The company has a wide distribution across the Indian Subcontinent and has a network of 500+ large distributors and 1+ million retail outlets. The market for hygiene products remains highly under-penetrated in India and hence the competition is less intensive. Overall this gives a wide economic moat due to the scale, distribution capacity and branding. Therefore this category gets 4 stars in P&G India fundamental analysis.
2. Business Model and Management (★ ★ ★ ★ ★)
The business model of the company is such that it operates mostly across feminine hygiene and healthcare business. In the Feminine Care business, Whisper continues to hold its position as the market leader. The brand continues to make strong progress in growing more users on sanitary napkins, particularly on top-tier usage. Their best in the class menstrual hygiene school program is also expanded to reach 50% of the urban girls across the country.
The Health Care business also continues to grow strong double-digit behind the strength of our equities and our portfolio, which includes Vicks VapoRub, Vicks Cough Drops, Vicks Action 500 Advanced, Vicks Inhaler and Vicks BabyRub. The growth is majorly driven by a combination of plans to win with consumers, winning versus the competition and winning in whitespaces such as the BabyRub version of the product. This overall shows a high growth model for the company in niche FMCG segments.
Mr R. A. Shah is the Chairman and is a leading solicitor and a senior partner of Crawford Bayley & Co., a firm of solicitors and advocate. Mr Madhusudan Gopalan is the Managing Director and has more than 20+ years of experience working across business units and diverse geographies like India, US and ASEAN countries. Overall the management has been stable and has not shown any previous cases of principal-agent conflict. Therefore this category gets 5 stars in P&G India fundamental analysis.
3. Growth Ratios (★ ★ ★ ★ ★)
The revenue has seen a CAGR growth of 28.20% in the last 10 years. The operating income and net income has also grown at a rate of 10.4% and 9.86% CAGR respectively during the same period. This indicates declining efficiency due to the increasing scale for the company. The working capital has remained linear and positive and the Cap-Ex also indicates a predictable linear growth for the company. Therefore this category gets 5 stars in P&G India fundamental analysis.
4. Profitability Ratios (★ ★ ★ ★ ☆)
The gross margin has shown a slight decline in recent years, this is due to the inflation-related costs and indicates that the company is not able to pass this down to its consumers. This is the nature of the FMCG business. The other margins along with RoA have shown a steady decline over the years due to increased manufacturing and selling costs. Therefore this category gets 4 stars in P&G India fundamental analysis.
5. Cash Flow Ratios (★ ★ ★ ★★)
The net income margin has slightly declined along with the Cap-Ex as a percentage of Sales. This indicates a linear and moderate upcoming growth for the company. The free cash flow as a percentage of net income is also high and stable. The operating and free cash flow growth rate has also stabilized over recent years. Overall this indicates a good cash flow position for the company. Therefore this category gets 5 stars in P&G India fundamental analysis.
6.Liquidity and Solvency Ratios (★ ★ ★ ★ ★)
The financial leverage is flat along with the debt to equity ratio for the company. The profitability margins are also stable, which overall means a good solvency position of the company. The current ratio along with quick ratio has also been high over the years. This indicates a surplus of current assets over current liabilities and a good cash and receivables position for the company. Therefore this category gets 5 stars in P&G India fundamental analysis.
7. Efficiency Ratios (★ ★ ★ ★ ★)
The table in the excel model is color formatted so the worst performance over the period is highlighted in red color and the best performance is highlighted by green.
Overall the business efficiency has improved considerably over the last 10 years. The inventory days have only gone down slightly whereas the payable’s period has been stable. The receivable days have also increased from 12 days to 24 days, due to increased focus on market penetration and extended credit to distributors. Overall the cash conversion cycle still remains negative. Therefore this category gets 5 stars in P&G India fundamental analysis.
8. Valuation Ratios (★ ★ ★ ★ ★)
The company operates in FMCG business which is characterized by linear growth in its market size. The company’s shares have, therefore, started trading at increasingly higher multiples in recent years. The valuation multiples are also backed by fundamentals such as increasing population, rising per capita consumption and increasing disposable income in the country. Therefore this category gets 5 stars in P&G India fundamental analysis.
9. ROE 5 way Du Pont Analysis (★ ★ ★ ★ ★)
The leverage ratio has come down over recent years and the Interest burden ratio has been stable. The asset turnover has seen a sharp improvement and the operating margin has stabilised over the years. Overall the company has seen a solid increase in Return on Equity due to improving financial position. Therefore this category gets 5 stars in P&G India fundamental analysis.
10. Future Prospects (★ ★ ★ ★ ☆)
Some insights for the coming years from the analysis, management discussions, and con calls are as follows.
- In India the Sanitary Pads have less than 20% market penetration leaves high growth opportunities for Whisper. Hence the company can have healthy growth and profitability due to strong branding, a wide distribution network, and new product launches.
- The company’s product portfolio is highly resilient and is expected to bounce back once the Covid-19 situation clears. Long-term prospects remain attractive on account of strong fundamentals and Economic moat which the company enjoys in a less competitive market segment.
- The near term upside in share price is limited due to high P/E multiples. However, the company remains a good long term investment due to its growth prospects.
Overall the company has solid fundamentals along with a large scale, solid branding and wide distribution. The product portfolio and business model are also well-diversified and the market still remains highly underpenetrated. This overall gives a good growth prospect to the company. Therefore this category gets 4 stars in P&G India fundamental analysis.
The overall rating is arrived by taking the average of the above 10 category ratings and rounded up if it is above or equal to 0.5 and rounded down if it is below 0.5.
Overall Fundamental Rating:
P&G INDIA SHARES (4.7/5)
Therefore it is a 5-star stock
★ ★ ★ ★ ★
|P&G India Shares|
|Economic Moat||★ ★ ★ ★ ☆|
|Business & Management||★ ★ ★ ★ ★|
|Growth Ratios||★ ★ ★ ★ ★|
|Profitability Ratios||★ ★ ★ ★ ☆|
|Cash Flow Ratios||★ ★ ★ ★ ★|
|Liquidity & Solvency||★ ★ ★ ★ ★|
|Efficiency Ratios||★ ★ ★ ★ ★|
|Valuation Ratios||★ ★ ★ ★ ★|
|ROE (Du Pont Analysis)||★ ★ ★ ★ ★|
|Future Prospects||★ ★ ★ ★ ☆|
|Overall Fundamental Rating||★ ★ ★ ★ ★|