Apr 28, 2024

P&G Hygiene stock needs June quarter recovery to continue

Procter & Gamble Hygiene and Health Care Ltd ended FY23 on a strong note. The company, which follows the July to June financial year, clocked better than expected profit in the June quarter (Q4FY23). Its portfolio includes brands such as Whisper, Head & Shoulders, and Vicks. While a combination of healthy revenue growth and significant gross margin expansion aided the company’s Ebitda margin, it is the steep cut in advertisement spends that led to an outperformance. Ebitda is earnings before interest, tax, depreciation, and amortization.

For perspective, advertisement, and sales promotion expenses as a percentage of revenue fell to 6.3% last quarter from almost 13% in Q4FY22. In this backdrop, P&G Hygiene’s Ebitda margin rose by as much as 1,630 basis points year-on-year (y-o-y) to 25.2%. One basis point is one-hundredth of a percentage point.

To be sure, the company’s advertisement spends are relatively high. Commenting on FY23 performance, analysts from Nirmal Bang Equities said, “Despite a sharp reduction in advertisement spend year-on-year, absolute advertisement spend has risen by over 40% in the last three years (higher than sales growth of about 30%)—unlike other staples peers who have cut their advertisement spends." Even so, it remains to be seen if P&G Hygiene can sustain its Q4 Ebitda margin trajectory. Here, the cost of raw materials such as pulp, waxes, oils, and chemicals necessitate closer tracking. Coming to growth, after a muted show for four quarters, P&G Hygiene saw double-digit revenue growth in Q4FY23 to ₹852.5 crore.

Meanwhile, P&G Hygiene’s dividend payout ratio continues to remain robust. In FY23, the company’s dividend per share stood at ₹185, which translates into a payout of about 88%. The return on equity and return on capital employed are nearly 81% and 88%, respectively, according to Nirmal Bang. Given this, the broking firm points out that the stock’s high multiples look sustainable.

But, due to pricey valuations, and uncertain pace of sales and earnings recovery analysts at Motilal Oswal Financial Services maintain a Neutral rating on the P&G Hygiene stock. Shares of the company trade at 51 times their FY25 estimated earnings, according to Bloomberg data. However, Motilal Oswal remains positive on the long-term growth potential of the sanitary napkin and healthcare business. For now, shares of P&G Hygiene are down by only 5% from their 52-week highs of ₹16,600 apiece seen on Tuesday, suggesting that investors are capturing the brighter picture adequately.