P&G in tough spot as focus on revenue growth leads to compromise on profit

The Procter & Gamble Hygiene and Healthcare (P&G) stock has sharply outperformed the Nifty FMCG (up 0.3 per cent), clocking a gain of 15 per cent over the past year.
 
The gain was largely on account of the tax cuts announced in September. On the operating front, however, the key metrics look weak both on the revenue and margin fronts.
 
P&G’s continued focus on growth in the underpenetrated category (feminine hygiene segment) with distribution expansion, advertising spends, and price cuts, among others are expected to keep margins under pressure for now.
 
Analysts at Kotak Institutional Equities believe that operating in underpenetrated categories is the right strategy even if there is a short-term compromise on margins.
 
P&G had also undertaken price cuts to the tune of 10 per cent for its feminine hygiene segment last year.
 
Advertising spends as a percentage of sales continued to remain elevated at 10-11 per cent in FY19, compared to 8-9 per cent almost three years ago.
 
The feminine hygiene segment (Whisper) accounts for close to 70 per cent of P&G’s sales. It follows a July-June accounting period.
 
The strategy to focus on growth is positive in the long term, given the lower penetration and rising awareness about sanitary napkins. However, in light of the slowdown, pushing revenue growth at the cost of profitability would be challenging, says an analyst.
 

This is because consumers may shift to cheaper products and rival brands. Johnson & Johnson (Stayfree) is pushing its products aggressively, which could impact P&G’s growth and market share.
 
After reporting a healthy 20 per cent growth in FY19, the company posted an 8 per cent rise in revenue for the September 2019 quarter. Further, it took a sharp 508-basis-point hit on Ebitda (earnings before interest, tax, depreciation and amortisation) margin to 21.8 per cent, year-on-year.
 
How the company balances the need for revenue growth while maintaining/improving margins, will be key.
 
Nevertheless, the long-term potential remains intact. This is driven by premiumisation of its product portfolio, which has given a fillip to both revenues and margins.
 
Given the near-term headwinds and expensive valuations, any correction would signal a good entry point for long-term investors.
 
The stock is currently trading at 56x its FY21 estimated earnings, which is higher than 40-45x in case of many other FMCG players.