Two of Procter and Gamble Co.’s listed subsidiaries in India have seen their share prices slide in November, coinciding with their results announcements. Gillette India Ltd’s share price has fallen by 5% since the beginning of November, while that of Procter and Gamble Hygiene and Health Care Ltd fell by 11% since it posted results on 9 November.

Bottles of Procter & Gamble Co.’s Pantene shampoo. Photo: Bloomberg

Sales in P&G Hygiene and Health Care’s feminine care segment (Whisper sanitary napkins) saw volume growth at 48%, outstripping value growth at 33%.

Its healthcare business (Vicks) saw sales rise 19%, while volumes rose 17%. In Gillette, the grooming business’ (shaving products) sales rose 16%, while battery sales rose 51% but oral care (toothbrushes) sales rose 4%.

In both companies, pricing has played a limited role in driving sales growth. The company has been cutting prices, introducing low-priced products to drive up penetration and usage of its products.

Also See | Cost pressure (Graphic)

It is driving its parent company’s strategy of deriving higher growth from developing markets.

This strategy is fine, except when raw material costs are rising sharply. And, add to that, rising employee costs, higher advertising and promotion costs, and even higher other expenditure due to rising freight costs of freight. Thus, P&G Hygiene and Health Care’s operating profit margin in the September quarter was down 4.25 percentage points, while that of Gillette was down 15 percentage points.

The net result was a 57% decline in Gillette’s net profit while that of P&G rose 36%, only due to a sharp jump in other income. The effect of rising costs on performance has been visible in 2010-11 as well.

So the fall in share prices may just reflect that valuations are not in sync with the company’s long-term business plans. Even now, P&G Hygiene and Health Care trades at a price-earnings (P-E) multiple of 41 times its 2010-11 earnings per share, while Gillette trades at 78 times. That is expensive by any standard, and especially in times of falling profitability. In the medium-term, expectations are that commodity inflation will soften, which should lead to cost savings. But the fire to drive up growth may just lead the companies to reinvest the savings in further expanding the market.

The companies are following a durable sales growth strategy, but investors would want to see that flow down to earnings growth as well.

The fall in share prices may mean investors are waking up to the prospect of the current situation lasting longer than they had expected.

Graphics by Yogesh Kumar/Mint

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