Buy Two, Get One Free

The recent bonus issue of Procter & Gamble confirms its commitment to shareholders. A report.

On August 21, when Procter & Gamble India (P&G) announced the issue of one bonus share for every two shares held, most analysts thought it was the prefect opportunity for re-rating the company. Earlier, P&G had alienated its shareholders when it transferred some popular brands to its 100 per cent subsidiary, P&G Home Products.

The bonus, after a gap of eight years, was probably meant as an indicator that P&G was not forgetting its Indian shareholders. And the turnaround in the sentiment of the stock has also been aided by the anticipation of new products that P&G, USA, plans to introduce. Pankti Bhansali, analyst, PR Subramanyam, a stockbroker, points out that after testing the Indian market with the launch of the shampoo Head & Shoulders, the parent is likely to enter the Indian market in a big way. Among the major products slated for introduction in the near future are: Crest - a toothpaste, Tide - a detergent and the Max Factor range of cosmetics.

 

Analysts point out that even if the parent introduces products through its 100 per cent subsidiary, P&G Home Products, P&G India would still benefit as it will be manufacturing those products. Since margins are much higher in manufacturing than in marketing and distribution, P&G India stands to gain. Also, this shields the company from the downside of higher advertising and distribution expenses in the medium term.

P&G is a leading player in over-the-counter healthcare (Vicks), feminine hygiene (Whisper), fabric wash (Ariel), skin care (Clearsil), soaps (Camay), shampoos (Pantene, Head & Shoulders) and mens toiletries (Old Spice). Personal products, which includes mens toiletries, feminine hygiene products and shampoos, contribute to around 32 per cent of its turnover.

Ariel is around 30 per cent of the turnover. The Vicks line of products including cough drops, tablets and liquids together account for 32 per cent. The balance six per cent comes from Clearsil, an anti-acne ointment. (Source of market share data: SBC Warburg)

P&G products have a strong brand image in almost all the segments. In the feminine hygiene care market, the two big players are Johnson & Johnson and P&G. Here, P&G is the market leader with a market share of 45 per by volume and 50 per cent by value. The penetration rate of feminine hygiene products in India is just 20 per cent, but analysts identify it as a major growth area.

In the personal product segment, P&G launched Pantene in November 1995 and more recently it launched Head & Shoulders. Currently, Pantene has 9 per cent share in the shampoo market in the Rs 1600 -crore shampoo market. In the healthcare segment, Vicks leads the balm market with a 36 per cent share. And in the detergents market, Ariel has a 8.5 per cent share market.

P&G has a wide distribution network with 3,000 stockists. The direct reach of most its product is estimated at 0.5 million retail outlets, with Vicks cough drop available in as many as 1.2 million outlet.

For the year ended June 1997, the company achieved a mere six per cent

growth in sales to Rs 387.58 crore, but achieved a 24 per cent rise in net profit at Rs 32.80 crore. This growth is attributed to product innovation, marketing initiatives and reduced operational cost. During the year, the companys core business categories grew over 10 per cent. Operating profit margins also improved to 18.93 per cent from 16.39 per cent in the previous year. But its interest cost increased by around 69 per cent to Rs 7.94 crore. Tax outgo for the year declined to Rs 7.04 crore against Rs 17.62 crore in the previous year. P&G currently gets tax breaks from its Goa unit, a backward area, and from export earnings. The earnings per share stood at Rs 22.73.

According to analysts, the future outlook for the company looks extremely bright as it will benefit from the huge promotional expenses taken in the past two years to give a brand image. And future profitability would come from volume growth and new products.

Last week, the stock price saw extreme movements in anticipation of the

bonus issue. On Tuesday, it had reached Rs 980 and fell to Rs 844 by Friday. At this price, the P/E ratio works out to 37. The bonus issue is bound to improve the liquidity in the scrip. Currently, the parent holds 65 per cent of the Rs 14.43-crore equity, foreign institutional investors hold 14 per cent and the free float is just 21 per cent. The scrip price is likely to witness a further correction in the next few days. Investors could buy at declines for the medium term.