Pick of the Week 12 Feb 2016

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Procter & Gamble Hygiene and Healthcare Ltd
Industry CMP Recommendation Add on Dips to band Sequential Targets Time Horizon
FMCG Rs. 5875 Buy at CMP and add on declines Rs. 5400-5577 Rs. 6537 & Rs.6820 1-2 quarters
P&G group established in 1964 in India, is one of the largest and amongst the fastest growing consumer goods groups in
HDFC Scrip Code PROGAMEQNR India. With pan India presence, it serves over 650 million consumers across the Beauty & Grooming segment, the
BSE Code 500459 Household Care segment as well as the Health & Well Being segment. Its listed entity PGHH`s principal activities are
manufacturing and marketing of healthcare (Vicks brands) and feminine hygiene products (Whisper brands). The Company
NSE Code PGHH concentrates on single geographical segment i.e within India and has insignificant contribution from exports.
Bloomberg PG IN
CMP as on 12 Feb 16 Rs. 5875 Investment Rationale:
1. Feminine hygiene segment
Equity Capital (Rs
Rs. 32.5 Low penetration in the feminine hygiene segment.
crs)
Wide distribution network and well known brand.
Face Value (Re) 10.0
Weak competition. Huge scope for rural penetration.
Equity Sh. Strengthening its market leadership in the feminine hygiene segment.
3.25
Outstanding (Cr)
Market Cap (Rs crs) Rs. 19070.7 2. Healthcare Segment:
Book Value (Rs) Rs. 378.5 Vicks has advantage of brand loyalty.
Avg. 52 Wk Volume 22329
Concerns:
52 Week High 7435.0 Competitive intensity: Vicks market share could decline:
52 Week Low 5171.0 Limited Product portfolio:
Parent has multiple companies in India creating conflict of interest
Royalty payment to parent:
Shareholding Pattern-%
Promoters 70.6 View and Valuation:
Feminine Hygiene and health care are among the least penetrated categories in FMCG. Due to product positioning, business
Institutions 13.4
fundamentals, innovative advertising and deeper distribution penetration we see sustainable growth in the future for
Non Institutions 16.0 PGHH. Vicks and Whisper will sustain double digit growth in medium term with its dominant positioning in its respective
Total 100.0 segments.

We feel investors could buy the stock at the CMP and add on dips to Rs.5400-5577 band (38-39.25x FY17E EPS) for a
Fundamental Research Analyst: Abdul Karim
abdul.karim@hdfcsec.com
sequential targets of Rs 6537 (46x FY17E EPS) and 6820 (48x FY17E EPS) over the next 1-2 quarters. At the CMP of Rs 5875
the stock trades at 41.3x FY17E EPS.

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Financial Summary (Standalone), Fiscal year ends in June,

Rs in Cr, Q2FY16 Q2FY15 YoY (%) Q1FY16 QoQ (%) FY15 FY16E FY17E
Net Sales 713.2 644.0 10.7% 598.1 19.2% 2332.3 2548.0 2866.5
EBITDA 216.1 128.3 68.4% 96.8 123.2% 484.4 594.0 657.1
PAT 146.7 90.7 61.8% 69.8 110.2% 346.1 418.0 461.3
Diluted EPS (Rs) 45.2 27.9 61.8% 21.5 110.2% 106.6 128.8 142.1
P/E (x) 55.1 45.6 41.3
EV / EBITDA (x) 37.6 30.4 27.2
RoE (%) 28.2% 27.5% 25.1%
(Source: Company, HDFC sec)
Company Description:
P&G group established in 1964, is one of the largest and amongst the fastest growing consumer goods groups in India. With
pan India presence, it serves over 650 million consumers across the Beauty & Grooming segment, the Household Care
segment as well as the Health & Well Being segment. Its product portfolio is famous for trusted brands that are household
names across India like Vicks, Ariel, Tide, Whisper, Olay, Gillette, Ambipur, Pampers, Pantene, Oral-B, Head & Shoulders,
Wella and Duracell.

P&G is known for its three entities in India (1) Procter & Gamble Hygiene, (2) Gillette India Limited and (3) Procter &
Gamble Home Products.
Company Listed on BSE/NSE Products
(1) Procter & Gamble Hygiene,(PGHH) Listed Whisper Sanitary Napkins, Vicks, Old spice
(2) Gillette India Limited Listed Gillette, 7 oclock, Wilkinson - male grooming products, Oral B, Duracell
(3) Procter & Gamble Home Products. Not Listed Ariel, Tide, Pantene, Head & Shoulders and Olay
(Source: Company, HDFC sec)

Its entity PGHH`s principal activities are manufacturing and marketing of healthcare (Vicks brand) and feminine hygiene
products (Whisper brand). The Company concentrates on single geographical segment i.e within India and has insignificant
contribution from exports.

Over the past three years, P&G group has invested over Rs 2,000 crore in India, mainly to set up manufacturing units to
reduce dependence on pricier imports. However, big investments have taken a toll on its profitability (esp of PGHP). Despite
pressure on sales, the focus on margins seems to have worked. Its superior product propositions and technological
innovations have enabled P&G to achieve market leadership in a majority of categories it is present in. P&G group is
committed to sustainable growth in India, and is currently invested in the country via its five plants and over nine contract
manufacturing sites, as well as through the 26,000 jobs it creates directly and indirectly.

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Business Overview:
PGHH has strategically limited its focus to just two brands--- Whisper and Vicks---which have the potential to become and
have become market leaders. Over the years it has gradually divested out of businesses which it considers non-core areas.

(1)Feminine hygiene segment

Feminine Hygiene sales contributes more than 60% to the topline.
(2) Healthcare segment:
All products in this segment are sold under the Vicks brand and include Vicks Vaporub, Vicks cough drop, Vicks inhaler and
Vicks Action 500 tablet. The company is the market leader in the cough, cold and hay fever segment of OTC products, with
more than a 30% market share.

Investment Rationale:
1. Feminine hygiene segment
Low penetration in the feminine hygiene segment
Feminine hygiene is among the most under-penetrated segments in the FMCG space. Market research firm AC Nielsens
data in 2011 shows that feminine hygiene market penetration was in fact at 11%. Earlier, product affordability was an issue,
now the price per pad has come down sharply over the past few years. Despite strong volume growth in the past few years,
we believe the penetration is currently only around 16%. This level is much lower compared to even other emerging
markets like China and Thailand (~50%- 60%), Indonesia (over 80%), Kenya (~30%), and equal to Uganda and Tanzania
(~16% each). In case of developed countries like the US, UK and Germany, the penetration level is ~90%-95%.

Market Penetration-Feminine Hygine

Market penetration calculation
Market Size of Categories=mn 373.56
Population above Poverty Mark, mn 168.10
Total Pad required/cycle 10
Average total cycle in a year 13
Average cost /pad-Rs 6
Cost per year 780
Total Market Potential-mn 131119.6
PGHH Segmental Sales in FY15 1400.28
Market Share 62%
Current Market Size 2259
Market Penetration 17.2%
(Source: Company, HDFC sec)

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We can arrive at ~17.2% penetration level starting from Central Statistical Organization (CSO) data on female population in
India in the age group of 15-45 years. With higher product affordability, rising distribution reach higher education and
income levels, rapid urbanization, rising proportion of working women, higher product awareness through media and
category development efforts, usage, in what is an essential product for a large segment of the population, is picking up and
will continue to be a strong long-term growth story, given the existing low levels.

Wide distribution network:

The company has one of the widest distribution networks in India, with direct contact to more than 6,50,000 stores by P&G
salesmen. Over the past few years, PGHH has been revamping its distribution chain, making it more cost-effective and
streamlining the distribution channels to focus on the promising markets alone. Also, the distribution system has benefitted
from the leverage synergies arising from the Gillette and P&G merger.

This marketing leader has carved a reputation for delivering high quality, value-added products to meet the needs of
consumers. There is considerable strategic planning in trying to tap the rural markets, educating customers and product
extensions to expand markets as PGHH is designed for long term sustainable growth.

Weak competition:
Johnson & Johnson (J&J, Stayfree and Carefree brands, 29% market share), doesnt have P&GHHs dedicated focus (J&Js
feminine hygiene segment accounts for only ~15% of total revenue compared to 62% in case of P&GHH) or distribution
reach. Kimberly Clarke (Kotex brand), the erstwhile third-largest player, has reduced focus on this business in recent years.
A recent entrant, Japanese company Unicharm (Sofy brand) has gained market share, but has limited distribution reach. All
large global players are in India. There is no significant local player in the market and so the entire growth is coming to
incumbents. Worldwide, private labels have had low success in this category.

Rural Penetration
Almost 90% of the sale of sanitary napkins comes from urban India. With rural share for whisper being negligible, for the
first time ever, PGHH entered into a Public Private Partnership with the National Rural Health Mission, Rajasthan. This is a
very innovative programme to provide women in Rajasthan with a better option of sanitary protection and promote the
whisper brand in the untapped and underpenetrated rural markets.

Strengthening its market leadership in the feminine hygiene segment

PGHHs market share (all its products are under Whisper brand) has grown sharply from 50% in FY09 to more than 60% in
FY15. While competitors did imitate PGHHs price cuts, they do not have the distribution strength, dedicated focus,
category development efforts, backing and product portfolio from the largest feminine hygiene company in the world
(P&G) or the strong balance sheet that P&GHH has. This means that PGHH can not only grow the category, but also
continue to gain market share from weaker players.

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2. Healthcare Segment:

Vicks has advantage of brand loyalty:

Vicks is a line of over the counter medications owned by P&G. Vicks has long been invested in the science and research of
respiratory health and through that dedication has developed a wide range of therapeutic products that offer effective
relief for all the major signs and symptoms of the common cold, flu and sinus pain and pressure.

Vicks as a brand is very popular in India and is synonymous with coldrub category.

Healthcare is a steady business which is expected to grow at around 13%-14% on a steady-state basis, led by volume
growth and price hikes.

Concerns:
Competitive intensity:
In Feminie Hygiene segment, J&J is currently the second-largest player with ~29% market share through its Stayfree and
Carefree brands. Smaller players in the market include a Japanese company called Unicharm, which launched its Sofy brand
of Sanitary napkins in India and is the only player to gain market share (albeit off a zero base) apart from P&GHH in the past
few years.

Competitors in Vicks segment are widespread across products like Vicks Vaporub, Vicks inhaler, Vicks cough drop and Vicks
Action 500 tablet, and include Reckitt Benckiser (which owns the erstwhile Paras Pharma business), Amrutanjan, Emami,
Dabur, and all the leading domestic and OTC pharma companies that have the products to cater to this segment.

Limited Product portfolio:

There is high dependence on a single product category of hygiene and health care. Any slowdown in the category or intense
competitive pressure may have a far-reaching impact on the company. Also concentration on one geographical segment i.e
India has economic risks attached.

Pricing concern:
There is a pricing war in feminine hygiene industry; year after year company has reduced its prices because of huge lower
affordability by customers and to expand its user base. If the company hikes prices in the feminine hygiene segment, it
would affect affordability and volume growth potential, which is currently very high.

Vicks market share could decline:

Vicks encounters competition from Halls (Cadbury), Strepsils (Reckitt Benckiser), Honitus (Dabur) etc. These are major
FMCG players and have a varied range of products. The company's sales volume growth could come under pressure from
intensifying competition.

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Royalty:
The rate of royalty to sales actually reduced from more than 5.0% of sales over FY07-FY11 to 4.7% in FY15. Any sharp
increase in royalty rate or any change in royalty agreement could affect future profitability.

Multiple companies operating in India:

P&G group has three companies in India, one of which is PGHH. This raises issues of conflict of interest as the interest of
minority shareholders of PGHH may not always be protected due to policy decisions taken by the parent company.

View and Valuation:

Feminine Hygiene and health care are among the least penetrated categories in FMCG. Due to product positioning, business
fundamentals, innovative advertising and deeper distribution penetration we see sustainable growth in the future for
PGHH. Vicks and Whisper will sustain double digit growth in medium term with its dominant positioning in its respective
segments.

We feel investors could buy the stock at the CMP and add on dips to Rs.5400-5577 band (38-39.25x FY17E EPS) for a
sequential targets of Rs 6537 (46x FY17E EPS) and 6820 (48x FY17E EPS) over the next 1-2 quarters. At the CMP of Rs 5875
the stock trades at 41.3x FY17E EPS.

Quarterly Financials
Rs in Cr, Q2FY16 Q2FY15 YoY (%) Q1FY16 QoQ (%) H1FY16 H1FY15 YoY (%)
Net Sales 713.23 644.03 10.7% 598.13 19.2% 1311.36 1220.34 7.5%
Other Operating Income 0.47 0.48 -2.1% 0.43 9.3% 0.9 0.66 36.4%
Income from Operation 713.7 644.51 10.7% 598.56 19.2% 1312.26 1221 7.5%
Raw Material Consumed 139.8 161.73 -13.6% 153.85 -9.1% 293.65 333.46 -11.9%
Stock Adjustment 26.83 8.77 205.9% -20.85 -228.7% 5.98 -10.69 -155.9%
Purchase of Finished Goods 101.71 88.19 15.3% 96.08 5.9% 197.79 176.35 12.2%
Employee Expenses 28.43 22.73 25.1% 33.62 -15.4% 62.05 55.88 11.0%
Selling & Administrative Expenses 113.89 119.42 -4.6% 117.39 -3.0% 231.28 251.81 -8.2%
Other Expenses 86.99 115.41 -24.6% 121.68 -28.5% 208.67 206.94 0.8%
Total Expenditure 497.65 516.25 -3.6% 501.77 -0.8% 999.42 1013.75 -1.4%
EBITDA 216.05 128.26 68.4% 96.79 123.2% 312.84 207.25 50.9%
Depreciation 14.19 15.87 -10.6% 12.71 11.6% 26.9 27.02 -0.4%
EBIT 201.86 112.39 79.6% 84.08 140.1% 285.94 180.23 58.7%
Interest 2.3 0.46 400.0% 1.15 100.0% 3.45 2.3 50.0%
Other Income 20.59 17.08 20.6% 21.21 -2.9% 41.8 20.59 103.0%
Profit before Tax 220.15 129.01 70.6% 104.14 111.4% 324.29 198.52 63.4%

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Tax 73.45 38.35 91.5% 34.36 113.8% 107.81 73.45 46.8%

Reported Profit after Tax 146.7 90.66 61.8% 69.78 110.2% 216.48 125.07 73.1%
Adjusted Profit after Tax 146.7 90.66 61.8% 69.78 110.2% 216.48 125.07 73.1%
Equity 324.6 324.6 - 324.6 - 324.6 324.6 -
Face Value 10 10 - 10 - 10 10 -
EPS (Adj) (Unit Curr.) 45.19 27.93 61.8% 21.5 110.2% 66.69 45.19 47.6%
(Source: Company, HDFC sec)

Financials

Income Statement:
Rs in Cr, FY13 FY14 FY15 FY16E FY17E
Total Sales 1684.9 2047.2 2332.3 2548.0 2866.5
Other Operating Income 1.9 3.7 1.5 2.5 2.9
Total income from operations (net) 1686.8 2050.9 2333.8 2550.6 2869.4
RM Cost 494.1 524.5 578.9 623.9 698.7
Purchases of stock-in-trade 243.8 283.4 343.3 459.1 459.1
WIP -33.4 4.9 -1.2 6.4 7.2
Employee Cost 99.7 95.0 113.3 122.4 137.7
Ad Spend 285.3 170.5 187.9 204.0 286.9
Royalty 79.8 95.5 111.4 119.9 134.9
Other expenses 267.0 456.4 515.8 420.8 487.8
Total expenses 1436.2 1630.2 1849.4 1956.5 2212.3
EBITDA 250.6 420.7 484.4 594.0 657.1
Depreciation and Amortisation 31.3 35.2 52.5 59.5 66.9
EBIT 219.3 385.5 431.9 534.6 590.2
Other Income 67.0 80.2 74.6 89.3 93.3
Interest 0.0 5.4 5.7 0.0 0.0
PBT 286.2 460.4 500.8 623.8 683.5
Tax Exp 83.0 158.3 154.7 205.9 222.1
PAT 203.3 302.1 346.1 418.0 461.3
EPS 62.6 93.1 106.6 128.8 142.1
(Source: Company, HDFC sec)

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Balance Sheet:
Rs in Cr, FY13 FY14 FY15 FY16E FY17E
EQUITY AND LIABILITIES
Share Capital 32.5 32.5 32.5 32.5 32.5
Reserves and Surplus 772.9 970.4 1196.2 1485.6 1808.7
Shareholders' funds 805.3 1002.9 1228.7 1518.1 1841.2
Other Long-Term Liabilities 0.4 0.3 0.0 0.0 0.0
Long-Term Provisions 2.4 2.7 3.3 3.7 4.0
Non-current Liabilities 2.8 2.9 3.3 3.7 4.0
Trade Payables 204.5 230.0 372.3 349.0 377.0
Other Current Liabilities 84.7 63.1 84.7 88.9 93.3
Short-Term Provisions 152.1 209.0 258.7 271.7 285.2
Current. Liabilities 441.2 502.1 715.7 709.6 755.5
TOTAL 1249.3 1507.9 1947.7 2231.4 2600.7
ASSETS
Fixed Assets 256.1 337.7 347.8 424.7 477.8
Tangible Assets 214.9 239.5 308.8 424.7 477.8
Capital work-in-progress 41.2 98.2 39.0 0.0 0.0
Deferred Tax Assets (Net) 3.0 7.2 4.0 4.2 4.4
Long-Term Loans and Advances 149.4 150.7 238.8 250.7 263.3
Other Non-current Assets 0.1 0.1 0.1 0.1 0.1
Non-current Assets 408.6 495.6 590.6 679.6 745.4
Inventories 118.9 118.5 119.1 139.6 157.1
Trade Receivables 80.9 86.1 113.9 133.5 154.5
Cash and Bank Balances 166.0 269.1 618.6 747.8 986.3
Short-Term Loans and Advances 438.4 493.5 451.2 473.7 497.4
Other Current Assets 36.5 45.3 54.4 57.1 59.9
Current Assets 840.7 1012.4 1357.1 1551.7 1855.3
TOTAL 1249.3 1508.1 1947.7 2231.4 2600.7
(Source: Company, HDFC sec)

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Financial Ratio:
Particulars FY13 FY14 FY15 FY16E FY17E
No of Equity Shares-cr 3.25 3.25 3.25 3.25 3.25
Enterprise Value-cr 18904.7 18801.6 18452.1 18322.9 18084.3

EPS 62.6 93.1 106.6 128.8 142.1

Cash EPS (PAT + Depreciation) 72.3 103.9 122.8 147.1 162.7
Book Value Per Share(Rs.) 248.1 309.0 378.5 467.7 567.2

PE(x) 93.8 63.1 55.1 45.6 41.3

P/BV (x) 23.7 19.0 15.5 12.6 10.4
Mcap/Sales(x) 11.2 9.2 7.9 7.2 6.3
EV/EBITDA 75.4 44.7 38.1 30.8 27.5

EBITDAM (%) 14.9% 20.5% 20.8% 23.3% 22.9%

EBITM (%) 13.0% 18.8% 18.5% 21.0% 20.6%
PATM (%) 12.0% 14.7% 14.8% 16.4% 16.1%

ROCE (%) 35.5% 46.4% 41.2% 41.1% 37.1%

RONW (%) 25.2% 30.1% 28.2% 27.5% 25.1%

Current Ratio 1.9 2.0 1.9 2.2 2.5

Quick Ratio 1.6 1.8 1.7 2.0 2.2

Debt-Equity 0.0 0.0 0.0 0.0 0.0

(Source: Company, HDFC sec)

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1 year daily closing price Chart

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Technical view:

The stock has provided a breakout of down trendline with an upgap which is a bullish indication for the short term.
The stock has completed a falling leg at 5171 with a hammer candle, so the bottom of 5171 is protected for the time being or at least till the stock
completes its upward retracement.
One can also observe a positive divergence in RSI which is a bullish sign.
We are also witnessed higher high formation on intraday charts which is a bullish continuation structure. Normally the stock may attempt to cover the
upgap giving investors a chance to add on to their positions.
Now the stock is retracing upwards towards 50% & 61.8% of the previous fall which are placed at 6301 and 6560 respectively. One can buy the stock at the
CMP and add on dips to 5400-5600 band with a stoploss placed at 5300 (on closing basis).

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Fundamental Research Analyst: Abdul Karim, abdul.karim@hdfcsec.com

RETAIL RESEARCH Tel: (022) 3075 3400 Fax: (022) 2496 5066 Corporate Office

HDFC securities Limited, I Think Techno Campus, Building - B, "Alpha", Office Floor 8, Near Kanjurmarg Station, Opp. Crompton Greaves, Kanjurmarg (East), Mumbai 400 042 Phone: (022) 3075 3400 Fax: (022) 2496 5066
Website: www.hdfcsec.com Email: hdfcsecretailresearch@hdfcsec.com.

"HDFC Securities Ltd. is a SEBI Registered Research Analyst having registration no. INH000002475."

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