Margin-led growth likely from FY19 for P&G Hygiene Healthcare

Stock trading at over 50x FY20 earnings estimates; this limits the upside for investors

P&G Hygiene Healthcare is one of the few multinational companies that didn’t see much of an impact on its market share because of competition from home-grown Patanjali Ayurved. However, in FY17 and FY18 (company 's fiscal year sends in June), the company didn't perform well as it took time to adjust to the new indirect tax norms. 

The good thing which is now helping the company is that it continued its profitable growth. Despite a steep decline in revenue in the fourth quarter of FY18, the firm was quick to reclaim the 25 per cent plus operating margin levels from Q1FY19. Return ratios have also strengthened from the sub-30 per cent on return on equity (ROE) and return on capital employed (ROCE) in FY17-FY18 and both metrics now stand at over 60 per cent each.

This is the reason why analysts at Motilal Oswal Financial Services believe that outlook for the company is encouraging. Much of the earnings revival is expected to be driven by its key segment–feminine hygiene business that accounts for over 65 per cent of its revenues. With Whisper sanitary napkins, the company has taken an aggressive stand to revive double-digit growth of its key product. 

Some of this is already reflected with revenues growing by over 18 per cent so far in FY19 which should continue given plans to expand its reach to two million outlets this fiscal.

Analysts at Motilal Oswal say that increasing pace of distribution expansion, continuing strong pace of category development efforts, rising advertisement spends after a lull in preceding years, healthy pipeline of new products, and willingness to take price cuts whenever required to boost growth are all encouraging developments that should aid rapid growth for the company over the long term. The potential for premiumisation also offers scope for margin expansion in the feminine hygiene division.

Likewise, in the healthcare segment, mainly comprising the Vicks brand, the new launch of FY18–Vicks Baby Rub, along with other existing products has helped regain the market share. With these initiatives in place, analysts at Equirus Securities expect the company to clock about 15 per cent revenue growth in FY18-FY21. Profitability, too, is expected to increase accordingly.

However, at 50 times FY20 earnings, rich valuations overshadow potential improvement in earnings.