Procter and Gamble Co.’s (P&G) initiative to grow faster in developing markets has galvanized its listed Indian arms, but their profitability has suffered in the bargain. P&G Hygiene and Health Care Ltd’s (PGHHCL) stock is down by about 0.5% since 25 April, while that of Gillette India Ltd is up 2%; the FMCG index of the Bombay Stock Exchange has gained about 4.5% in the same period. Considering how their profits fell, investors appear to be taking a longer view.
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During the March quarter, PGHHCL’s net sales rose 14% year-on-year (y-o-y), lower than the growth in gross sales due to a higher excise outgo. The government had imposed excise on sanitary napkins in budget 2010-11, which was then revoked in the next budget. The rollback will start showing in full from its June quarter results. This will have a significant effect, as PGHHCL’s gross sales (before excise) rose by 19% y-o-y during the quarter, with feminine care (sanitary napkins) growing by 23% and healthcare (Vicks) growing by 11%.
The feminine care business has done very well. In a post-results conference call, the parent company had said Whisper’s sales in India had risen by 40% y-o-y on the back of a relaunch of Whisper Choice. The firm had lowered prices to encourage higher usage and adoption, explaining the difference between volume and value growth.
After the excise rollback, costs will decline and margins will improve, which should become visible in the June quarter. Material costs rose by about 51% y-o-y during the quarter, and lower employee and advertising costs helped restrict the fall in margins.
Gillette, too, followed a similar pattern. Its sales rose by about 19% y-o-y and material costs rose by 33%; but in its case, employee costs and advertising costs, too, rose sharply. As a result, operating profit fell 50% y-o-y and net profit by a similar percentage.
Here too, volumes tell a different story. India’s sales of blades and razors rose 25% y-o-y in volume terms.
The company has made razors more affordable and recently launched a low-priced model to gain new customers. In value terms, its grooming segment’s sales rose by 19% y-o-y, oral care (toothbrush) by 11% and the relatively smaller batteries segment by 64%. Toothbrush sales were up 25% in volume terms, too.
The parent company’s immediate focus is on driving up India’s contribution to its sales, while profitability will take a back seat. For Indian shareholders, what that means is they can expect their companies to grow sales at a very healthy rate. Till these businesses reach critical mass, profit margins may continue to be volatile.
Graphic by Yogesh Kumar/Mint
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