Resilient portfolio may help P&G Hygiene recover faster than peers

However, high valuation may restrict immediate gains for the stock

Even as the home and personal care (HPC) segment, which was already under pressure before the Covid-19 outbreak, has taken a further hit, a few products related to hygiene and healthcare stand out. One company that could benefit on this count is Procter & Gamble Hygiene and Health Care (P&G Hygiene), which sells popular consumer products like Whisper (sanitary napkin) and Vicks (cold, cough and flu relief).

Though the company’s top line declined by 6.2 year-on-year (YoY) to Rs 656.1 crore in the March 2020 quarter (Q3), mainly because of Covid-19-led disruptions, it is likely to see a faster recovery than many other players. “P&G Hygiene has a more resilient portfolio than that of peers to withstand the Covid-19-related disruption in the post-lockdown phase,” analysts at Motilal Oswal Securities said in their Q3 updated reported. 

P&G Hygiene is expected to clock around 6 per cent revenue growth in financial year 2020-21 (FY21), which is 3-4 per cent higher than sales growth estimates for others like Dabur and Marico. Although the FY21 outlook is not comparable as the worst-hit June 2020 quarter will not get accounted in FY21 performance of P&G as it follows July-June accounting period, the company’s sales decline in Q3 was relatively lower than its peers, who saw fall in sales of about 12 per cent. In fact, Hindustan Unilever, too, saw around 9 per cent decline in sales in the quarter.

 

 

Meanwhile, normalisation of ad spends coupled with strong gross margin tailwinds would support earnings, which analysts estimate to grow by 14 per cent in FY21. P&G Hygiene had raised its ad spends in the last couple of years, which some analysts say is unlikely to increase further and should prove supportive in terms of increasing top line. What is also encouraging is structural category growth and premiumisation potential of sanitary napkins, which underlines P&G Hygiene’s long-term prospects as the feminine hygiene segment accounts for around 70 per cent of its sales.

On the flip side, while the outlook is better, there is some risk in the form of competition (Stayfree of Johnson & Johnson) and down-trading, ie consumers shifting to lower priced brands.

Second, pricey valuations may cap significant gains in the stock. At 64 times its FY21 estimated earnings, P&G Hygiene is currently trading at 19 per cent premium to its five-year valuation mean, and higher than 40-57 times valuations of other HPC majors.

Thus, investors should await a good entry point.