Analysis: Procter & Gamble Hygiene and Health Care Ltd

The current section of the “Analysis” series covers Procter & Gamble Hygiene and Health Care Ltd (PGHH), a part of the Procter & Gamble (P&G) group, USA. The company sells female hygiene products (Whisper sanitary pads), healthcare (Vicks) and men’s grooming products (Old Spice) in India.

To benefit the maximum from this article, an investor should focus on the process of analysis instead of looking for good or bad aspects of the company. She should learn the interpretation of different types of data and transactions and pay attention to the parts of annual reports etc. used to get the information. This will help her in improving her stock analysis skills.

Procter & Gamble Hygiene and Health Care Ltd: Detailed Fundamental Analysis

Procter & Gamble Hygiene and Health Care Ltd does not have any subsidiaries or joint ventures; therefore, it reports only standalone financials.

We believe that while analyzing any company, an investor should always look at the company as a whole and focus on financials, representing the entire company’s business picture including its subsidiaries, joint ventures, etc. Consolidated financials of a company present such a picture. Therefore, if a company reports both standalone and consolidated financials, then in such a case, it is advised that the investor should prefer the analysis of the consolidated financials of the company, whenever they are present.

Further advised reading: Standalone vs Consolidated Financials: A Complete Guide

Until now, PGHH has reported only standalone financials; therefore, we have used the standalone financials in the analysis.

Financial and Business Analysis of Procter & Gamble Hygiene and Health Care Ltd:

In the last 10 years, Procter & Gamble Hygiene and Health Care Ltd has increased its sales at an annual growth rate of 7% from ₹2,051 cr in FY2014 to ₹3,918 cr in FY2023. Further, sales of PGHH have increased to ₹4,007 in 12 months ended Dec. 2023.

Over the last 10 years (FY2014-2023), the operating profit margin (OPM) of PGHH has fluctuated significantly between 20% and 29%. The net profit margin (NPM) of the company has followed the trend of its OPM and has varied from 14% to 19% during FY2014-FY2023.

The financial picture of the company’s historical performance presents more insights if an investor extends her analysis to the earliest available financial information from 1991 onwards present in its historical annual reports available on the website of BSE Ltd.

In the below table, we have presented the data of sales, net profits and net profit margin (NPM) for the last 33 years (1991-2023) for Procter & Gamble Hygiene and Health Care Ltd.

In the 33-year historical performance of Procter & Gamble Hygiene and Health Care Ltd, an investor comes across many periods where its sales declined e.g. FY1995, FY2001, FY2006, FY2007 and FY2016. On many occasions, its net profit margins deteriorated even to the extent of net losses e.g. FY1992-FY1993. During FY2003-FY2004, FY2007, FY2011-FY2013, FY2018-FY2020 and FY2022 are some of the periods when PGHH suffered a significant decline in its profit margins.

To understand the reasons for such fluctuations in the business performance of Procter & Gamble Hygiene and Health Care Ltd over the years, an investor needs to read the publicly available documents of the company like annual reports from 1997 onwards, management interactions, presentations as well as corporate announcements.

After going through the above-mentioned documents, an investor notices the following key factors, which influence the business of Procter & Gamble Hygiene and Health Care Ltd. An investor needs to keep these factors in mind while she makes any predictions about the performance of the company.

1) Intense competition faced by PGHH in each of the product categories:

Procter & Gamble Hygiene and Health Care Ltd faces strong competition for each of its product segments: Whisper (sanitary pads), Vicks (healthcare) and Old Spice (men’s grooming).

In the case of Whisper, it faces competition from financially strong MNC players like Johnson & Johnson (Stayfree, Carefree), Kimberly Clark (Kotex), Unicharm (Sofy) and SCA Hygiene (Libresse). Other than these MNCs, Indian players Mankind Pharma (Don’t Worry), Emami (She Comfort), Carmesi, Nua Woman etc. are also present in the market.

FY2015 annual report, page 4:

Whisper continues to be the market leader despite stiff competition from other category players.

In the healthcare (cough and cold) category, PGHH’s brand (Vicks) faces competition from Reckitt Benckiser (Strepsils), Dabur (Honitus), Halls, Himalaya (Koflet), etc.

At times, despite the well-established brand name and years of goodwill, sales of Vicks suffered due to competition.

FY2008 annual report, page 4:

The cold tablets category witnessed intense competitive activity this year, due to which sales of VICKS Action 500+ suffered…

In the men’s grooming segment, the company’s brand (Old Spice) faces competition from numerous players like Unilever (Axe), Vini Cosmetics (Fogg), Raymonds (Park Avenue), Nivea etc.

Over FY2016-FY2019, sales of Old Spice brand declined sharply as competition beat it in getting customers’ wallet share. The intensity of competition was so severe that Procter & Gamble Hygiene and Health Care Ltd decided to pause further investments in the Old Spice brand.

FY2016 annual report, page 9:

Old Spice de-grew 15% on sales in the Financial Year 2015-16. It was a conscious choice to hold back investments and review the right business model…there have been multiple new brand/form launches

Procter & Gamble Hygiene and Health Care Ltd acknowledged the high competitive intensity in its business during its analyst meeting in Sept 2023.

Transcript of analyst meet by PGHH, September 2023, page 5:

Success in our highly competitive industry also requires agility

The company also acknowledged that over the years, the competitive intensity in the business has increased as new players are entering the business.

Transcript of analyst meet by PGHH, September 2023, page 11:

How has competitive landscape changed over the last 5 years?…Yes, the competitive landscape has evolved, and more competition has entered the category.

Apart from branded, organized players, PGHH also faces competition from unorganized players who form about 5% of the market.

Transcript of analyst meet by PGHH, September 2023, page 10:

Unorganized segment is around 5% of the overall market share

Other than the competition from organized and unorganized players, Procter & Gamble Hygiene and Health Care Ltd also faces the challenge of counterfeit, fake, lookalike products in the market. At one point in time, fake, lookalike products impacted more than 50% of sales of Vicks Action 500.

FY2000 annual report, page 2:

There were close to 60 look-alike brands of various VICKS products in the market. Research conducted by ORG and ACNielsen indicated that the pass-off products were impacting our Health Care business upto 10% and in the case of VICKS Action 500 upto 54%.

On an overall basis, such fake, lookalike products impacted its business by 10%.

FY2000 annual report, page 1:

Such brands impacted our business up to 10%

An investor should keep track of initiatives undertaken by PGHH to counter competition including the threat of pirated, fake, lookalike products.

Also read: How to do Business Analysis of a Company

2) Pricing power of Procter & Gamble Hygiene and Health Care Ltd:

Due to severe competition in all the product categories from financially strong MNC and Indian players, PGHH’s pricing power is limited.

For example, during FY2022 when raw material/commodity prices increased in post-covid recovery as well as the sharp increase in the cost of sea trade, Procter & Gamble Hygiene and Health Care Ltd faced a big hit on its profit margins as it could not pass on the increase in input costs without fearing loss of sales.

Transcript of annual general meeting (AGM), November 2022, page 5:

we are able to maintain a healthy net margin of 15pc despite an unprecedented headwind…commodity inflation ranging from 35% to 84% and…impacted us by 40% of our profits.

The company acknowledged that its price increase to customers was much lower than the increase of 40%-80% in its input costs which led to a decline in profit margins.

Transcript of annual general meeting (AGM), November 2022, page 31:

on our key commodities we’re seeing between 40%-80% of commodity pricing. Our consumer pricing is not in that range. It is much, much lower

The company told its shareholders in its 2023 AGM that it has to take the affordability of products to its customers into account whenever it thinks about increasing prices even if it means that during periods of sharp input price increases, it has to take a hit on its profit margins. If the company increases prices in line with input price increases, then the customer may stop using its products and start using competitors’ products.

Transcript of annual general meeting (AGM), November 2023, page 24:

We have been balancing the need for pricing with consumer affordability in periods of steep commodity up charges

In fact, in the past whenever the company decided to grow its business sharply, then it had to do so by cutting its prices and compromising on profitability.

For example, during FY2011-FY2014, when PGHH nearly doubled its sales in 4 years from ₹1,037 cr in FY2010 to ₹2,051 cr in FY2014, then it had to aggressively cut down prices and its NPM fell from 20% in FY2010 to 12% in FY2013. The price cuts started in FY2011.

FY2011 annual report, page 5:

In order to reach more consumers with our product offering, by addressing their biggest barrier of affordability, Whisper Choice was priced down.

During FY2015 to FY2017, the company decided to focus on its profitability. It could improve its NPM from 15% in FY2015 to 19% in FY2017; however, during this period, the company did not have any sales growth as its sales declined marginally to ₹2,320 cr in FY2017 from ₹2,334 cr in FY2015.

Therefore, in the absence of pricing power, Procter & Gamble Hygiene and Health Care Ltd has to choose between growth or profitability.

During FY2017-FY2019, when it grew its sales from ₹2,320 cr in FY2017 to ₹2,947 cr in FY2019, then its net profit margin (NPM) declined from 19% in FY2017 to 14% in FY2020.

Low pricing power in the hands of PGHH is not a new challenge for the company. In FY2002, the company realized that it is not able to grow its exports and as a result, due to its inability to reach a large scale of production, its exports were becoming economically unviable as it was not able to beat competitors’ pricing.

FY2002 annual report, page 3:

Exports mainly of VICKS VapoRub to ASEAN, Australia and Japan remained stable…lack of growth in exports is pushing cost per unit to a level which is becoming uncompetitive.

Whenever the company faced adverse taxation changes like an increase in excise duty, then the company could not pass it on to the customers and as a result, its profit margins declined.

For example, in FY2011, when govt. increased excise duty, then it led to a decline in the profit margins of Procter & Gamble Hygiene and Health Care Ltd.

FY2011 annual report, page 4:

While the sales have grown…(PBT) and…(PAT) have decreased…This is primarily due to increased investments in marketing initiatives, higher commodity prices and impact of higher excise duty for nine months.

Moreover, sales of Vicks are highly dependent on the monsoon and winter seasons. When the monsoon is good, then purchasing power in the rural areas increases and when winter is severe, many people catch cold and thereby sales of Vicks increase.

FY2004 annual report, pages 2 and 8:

This unprecedented performance benefited from good monsoons, which not only increased rural purchasing power but also increased demand for cold relief remedies.

This business is also heavily dependant on good monsoon and winter seasons.

Also read: How to do Business Analysis of FMCG Companies

3) Compulsion of high advertisement spending for maintaining and growing the business:

In the business of Procter & Gamble Hygiene and Health Care Ltd (PGHH), it is compulsory to continuously do advertisements and be present in the mind space of the customer.  In one of the annual reports, PGHH clearly said that it is advertisements that lead to the consumption of its products and without advertisements, it cannot be an effective seller.

FY2002 annual report, page 1:

Advertising drives FMCG consumption. And TV is the lifeblood of FMCG Communication. Without TV Advertising we are nowhere as effective.

This is understandable because when a customer is faced with numerous choices of competing products, all with acceptable quality and from financially strong players, then companies need to continuously remind the customer about their product/brand so that she remembers it while making the next purchase.

Continuous advertisement is compulsory because the customer can easily replace the product of one company with another without any significant loss of functionality.

For example, during FY2011, PGHH faced a low demand for Vicks Action 500 because other generic products were providing a better value proposition to the customers. In response to declining sales, PGHH had to increase advertising spending on Vicks Action 500 and then it could recover its demand.

FY2011 annual report, page 5:

Vicks Action-500 faced aggressive competitive challenge from generics during the Financial Year. During the second half of the Financial Year, your Company invested in superior advertising support for the product. This helped to recover demand for the product

However, due to aggressive advertisement spending in FY2011, the company definitely increased its sales by 14% from ₹914 cr in FY2010 to ₹1,037 in FY2011, but, its net profit margin during the year declined to 15% from 20% in FY2010.

As a result, it is usually seen that when companies need to grow their business, then they need to focus on aggressive marketing by spending a lot more money than usual. On the contrary, if they cut down on advertisement expenses, then their growth rate slows down.

In the below table, we have analyzed the advertisement, promotions and incentives expenses of Procter & Gamble Hygiene and Health Care Ltd over the last 28 years (FY1996-FY2023) and presented them alongside sales growth of each year and the net profit margin (NPM) of the year to see the impact of advertisement spending on sales growth and profitability.

In the above table, an investor would find many periods where aggressive advertisement spending led to fast sales growth.

For example, in FY2006-FY2015 when PGHH sharply increased its advertisement spending from 8% of sales in FY2006 to 18% of sales in FY2010 and continued it at about 14% until FY2015. During this period, sales of PGHH increased almost four times from ₹597 cr in FY2006 to ₹2,334 cr in FY2015. However, during this period, the profit margin of the company declined from 23% in FY2006 to 15% in FY2015 and touched a low of 12% in FY2013.

Please note that in the above table despite high advertisement expenses in FY2006 and FY2007, the sales seem to have declined. However, this decline is due to the transfer of detergent contract-manufacturing business by PGHH to another Indian P&G subsidiary, Procter & Gamble Home Products Pvt. Ltd (PGHP). Contract manufacturing of detergents for PGHP used to be a significant revenue source for PGHH. As a result, during FY2006-FY2007, the sales of PGHH declined.

FY2006 annual report, page 2:

overall sales decreased 17%, this was primarily due to divestment of the detergent contract manufacturing business during the year.

FY2007 annual report, page 5:

current year’s sales does not include the divested detergent contract manufacturing business whereas the previous base period had part (Rs. 92.4 crores) sale of this discontinued business.

Thereafter, when to focus on profitability, in FY2016-FY2017, Procter & Gamble Hygiene and Health Care Ltd (PGHH) cut down on advertisement spending from 14% in FY2015 to 9% in FY2016 and FY2017 each, then it definitely increased its net profit margin from 15% in FY2015 to 19% in FY2017. However, its sales declined from ₹2,334 cr in FY2015 to ₹2,320 cr in FY2017.

Thereafter, the next year, in FY2018, the company changed tracks and attempted to regain sales growth. It achieved sales growth by spending more money on advertisement; however, its profitability suffered.

FY2018 annual report, page 6:

Profit After Tax (PAT) was ₹375 crores, down 13% versus year ago largely behind increased investments on product innovations and advertising.

The relationship between advertisement spending and sales growth is very old for PGHH. In FY1998, when the company’s sales grew by 14%, then it intimated to its shareholders that it was due to aggressive advertisement spending as it faced strong competition.

FY1998 annual report, page 2:

Competitive response in our business was keen during the year which resulted in higher promotional and advertising expenditure. The total advertising and promotional expenses grew from 7% of sales to 9%-.

In FY2003, the company increased its advertisement spending. It achieved higher sales growth, but its profit margins declined from the previous year.

FY2003 annual report, page 1:

net profits after tax decreased…a 12% fall…primarily due to a one-time provision of taxes…marketing investment…involving preseason advertising on VICKS and a large-scale sampling of the newly launched WHISPER Maxi Extra Long

In FY2013, when PGHH relaunched the Old Spice brand, then in the initial period, it spent a lot of money on its advertising and as a result, the Old Spice brand witnessed good sales growth.

FY2014 annual report, page 9:

…Old Spice into your Company, Financial Year 2013-14 was a strong year for the brand, with business results exceeding management expectations. This was behind our strong marketing efforts and investments in advertising and distribution expansion.

Recently, in FY2021, the company increased its advertisement spending sharply to 15% of sales from 11% of sales in FY2020. As a result, in FY2021, sales of PGHH grew by 19%.

In FY2023, when Procter & Gamble Hygiene and Health Care Ltd tried to control its advertisement spending, its sales growth slowed down to almost zero.

Please note that in recent years, after the adoption of new Indian Accounting Standards (IndAS), advertisement expenses seem lower because trade discounts, which earlier used to appear as a separate expense are now netted from the sales. In the past, PGHH used to spend about 6% of sales (FY2014 and FY2015) on trade discounts/incentives.

FY2023 annual report, page 73:

Revenue is measured net of trade discounts, rebates and various types of Marketing and Distribution Activities such as incentives and promotions.

Therefore, an investor would appreciate that high sales promotion/advertisement spending is a compulsory expense for PGHH and any attempt to reduce it immediately leads to a slowdown of growth.

Also read: How to do Financial Analysis of a Company

4) Cost efficiency/productivity improvement by Procter & Gamble Hygiene and Health Care Ltd:

We discussed earlier that PGHH does not have strong pricing power over its customers due to intense competition from financially strong players with equally good products. As a result, it has to keep its prices competitive otherwise the customer will switch to other manufacturers.

In addition to the low pricing power, PGHH has to compulsorily spend a large amount of money on advertisements to sustain and grow its business.

In such a tough business environment, PGHH has to rely on cost competitiveness to improve its profit margins.

Over the years, the company has taken multiple such steps.

4.1) Getting rid of less profitable products:

Over the years, Procter & Gamble Hygiene and Health Care Ltd (PGHH) has removed many products from its portfolio, which did not perform well.

For example, in the past, PGHH removed Mediker, Clearasil and Old Spice brands from its portfolio as they were not doing good and their sales were declining.

FY1998 annual report, page 3:

Company has decided to focus all its financial and other resources in growing the WHISPER and the VICKS…there are limited resources now directed towards brands such as OLD SPICE, CLEARASIL and MEDIKER…sales of CLEARASIL and OLD SPICE during the year declined by 13%.

The company entered into an agreement with Marico Industries Ltd to sell off the Mediker brand and give distribution of Clearasil and Old Spice.

FY1999 annual report, page 3:

Company divested MEDIKER anti-lice shampoo business to Marico Industries Limited for Rs. 10 crores…arrangement with Marico Industries Limited for distribution of CLEARASIL and OLD SPICE.

Later on, in FY2003, Procter & Gamble Hygiene and Health Care Ltd licensed Old Spice to Meneses Cosmetics P. Ltd. for 10 years.

Company licensed the OLD SPICE trademark and business to Menezes Cosmetics Private Ltd., Goa, for a period of ten years to manufacture, sell, distribute and market OLD SPICE products in India, Sri Lanka and Bangladesh.

In addition, multiple times, before launching any product on a mass scale, the company test-launched it in limited markets and when it did not meet the expectations, then withdrew it to prevent further losses.

For example, in FY1998, it withdrew two variants of Vicks when they did not meet expectations.

FY1998 annual report, page 3:

test market results for both VICKS VITAMIN-C and VICKS SUPER BALM were not encouraging they are being withdrawn from the test market.

Similarly, in FY2001, it withdrew Tampax tampons when it did not do well in test markets.

FY2001 annual report, page 3:

During the year TAMPAX tampons’ test market launch in Chennai and Madurai was discontinued due to lower-than-expected consumer response.

In FY1997, the company intimated to its shareholders that its export sales had declined because it phased out less profitable products.

FY1997 annual report, page 2:

Higher import tariffs, strict regulatory environment in Sri Lanka & Bangladesh and phasing out of low profitability products have resulted in lower exports

Advised reading: How to study Annual Report of a Company

4.2) Continuous focus on rationalizing the workforce by offering voluntary retirement scheme (VRS):

Over the years, Procter & Gamble Hygiene and Health Care Ltd had continuously tried to reduce its workforce and rely more on outsourcing/contract work.

During the initial part of available annual reports, during 10 years (FY1998 to FY2008), it reduced its employee strength by almost two-thirds from 725 in FY1998 (page 4 of FY1998 annual report) to 250 in FY2008 (page 6 of FY2008 annual report).

FY1999 annual report, page 3:

Company offered a VRS to approximately 60 employees by re-engineering our work processes

Even later on, the company continued to offer VRS to its employees.

FY2013 annual report, page 53:

Salaries and Wages includes ₹463 Lakhs (Previous year: ₹ Nil) towards expenditure on Voluntary Retirement Scheme.

FY2018 annual report, page 77:

Salaries and Wages includes ₹58 lakhs (Previous year: ₹302 lakhs) for expenditure on Voluntary Retirement Scheme.

4.3) Optimizations in the manufacturing plants and processes:

Over the years, Procter & Gamble Hygiene and Health Care Ltd (PGHH) took many steps to improve its manufacturing activities and save costs.

Recently, in FY2022, PGHH changed the nature of its arrangement with another Indian P&G company, Procter & Gamble Home Products Pvt. Ltd (PGHP). Earlier, PGHH used the services of PGHP as a toll manufacturer meaning PGHH used to procure raw material and give it to PGHP who in turn converted it into finished goods that PGHH bought to sell in the market. In this arrangement, PGHH had the ownership of raw materials/inventory.

Now, PGHH has changed the nature of this arrangement with PGHP to contract manufacturing i.e. PGHP will buy raw material itself, convert it into finished goods and then sell these to PGHH. Now, the ownership of inventory stays with PGHP.

Apparently, due to a change in the nature of the contract, PGHH is able to save about ₹10 cr every year.

FY2023 annual report, page 8:

In the year 2021-22, the Company had replaced the earlier Toll Manufacturing arrangement with a Contract Manufacturing arrangement for abovementioned sourcing of sanitary napkin products, in order to benefit from certain incremental pre-tax savings (~ ₹ 10 Crores per year)

Previously, when PGHH used to contract-manufacture shampoos for PGHP, then in FY1999, it decided to stop that business because the change in formulation of the shampoo required a lot of new investment, which was not making financial sense.

FY1999 annual report, page 3:

The manufacturing arrangement which your Company has with Procter & Gamble Home Products Limited (PGHP) for shampoo manufacture will be terminated…since there has been a change in the formulation of the product…This change…would necessitate a very high investment in capital which we believe is not advisable.

On other occasions also, PGHH had taken multiple such steps to save on costs. For example, in FY2002, it consolidated its manufacturing operations in Goa from two plants to one plant as it saved on operational costs.

FY2002 annual report, page 2:

manufacturing operations at Honda, Goa were consolidated into the factory at Kundaim, Goa. This will significantly reduce operational costs and improve efficiencies. As a result, VICKS VapoRub (for domestic sales) and WHISPER Feminine Hygiene products are now manufactured at one location.

In FY2003, when exports of Procter & Gamble Hygiene and Health Care Ltd started losing competitive advantage due to smaller scale, then it outsourced manufacturing of export products to achieve cost efficiencies.

FY2003 annual report, page 3:

During the year, we have outsourced manufacturing of export products to a third party with a view to achieve cost efficiencies and stay competitive

Also read: How to analyse New Companies in Unknown Industries?

4.4) Other measures to improve efficiency:

Additionally, PGHH took steps to improve its advertisement spending and distribution functions to save on costs.

Now the company has changed its approach from channel-specific to an integrated media approach as it proved more resource-efficient.

Transcript of analyst meeting, September 2023, page 5:

We have moved away from media planning in silos (TV, digital, ecommerce separately) to an Integrated Media Approach, where an algorithm powered with latest trends and historical data…helps us achieve the maximum reach at the lowest cost

Similarly, the company improved its supply chain and distribution processes and could use its resources more efficiently leading to quick movement of goods, and cost savings.

Transcript of analyst meeting, September 2023, page 5:

we are leveraging analytics to optimize total distance travelled and reduce number of touches by the product, while improving our speed and reliability to market. This has led to 35% faster speed to market, and reduction of around 6 million Kms

According to Procter & Gamble Hygiene and Health Care Ltd, due to its productivity improvement initiatives, in FY2023, it could save ₹105 cr.

Transcript of analyst meeting, September 2023, page 5:

Specifically last year, through our productivity interventions, this company achieved savings of over Rs. 105 crores.

Also read: Operating Performance Analysis: A Simple & Complete Guide

5) Regulatory risk faced by Procter & Gamble Hygiene and Health Care Ltd:

Most of Vicks products of PGHH are effective medications for cough, cold, flu etc.; however, they are considered safe to consume without medical prescription. Therefore, consumers can buy Vicks products over the counter (OTC) from shops without doctor’s advice.

However, there have been times when govt. decided that the drug content of Vicks must be sold only after a doctor’s prescription, which affected its sales.

FY2006 annual report, page 4:

government changed the regulations and mandated that dextro-methorphan hydrobromide the active ingredient of VICKS Formula 44 Cough Syrup can only be sold under a doctor’s prescription and not Over The Counter (OTC) as it earlier was…Sales of VICKS Formula 44, in the meantime, continue to be adversely affected.

Therefore, an investor should closely monitor regulatory developments related to Vicks products as any restriction to sell these products over-the-counter can have a serious impact on PGHH sales.

In the last 10 years (FY2014-2023), the tax payout ratio of Procter & Gamble Hygiene and Health Care Ltd has largely been in line with the standard corporate tax rate in India except in FY2023 (19%), which was due to a reversal of tax provision undertaken by the company as it received a favourable judgement in another similar case.

Q1-FY2024 results, page 2:

During the previous year ended June 2023, the Company reversed tax provisions amounting to Rs. 5,844 lakhs in respect of past Income Tax Litigations…based on a favourable ruling…in a similar case

This reversal of the provision of income tax was the main reason for a sharp increase in PAT in FY2023 to ₹678 cr from ₹576 cr in FY2022.

In the past, PGHH has benefited from income tax incentives as it based its manufacturing plants in Goa and Baddi, Himachal Pradesh when govts. gave perks for promoting manufacturing in these locations.

FY1997 annual report, page 2:

Growth of 24% in profit after tax is the result of a lower tax rate applicable to the new Health Care plant at Goa.

FY2006 annual report, page 2:

to take advantage of available tax benefits, we are setting up two new plants to manufacture healthcare products at Baddi, Himachal Pradesh.

Tax incentives for Goa plant ended in FY2002 and the company witnessed an increase in tax payouts.

FY2002 annual report, page 1:

Profit After Tax at Rs.77 crores (Rs.82.7 crores in previous year) declined by 7% despite a 5% increase in Profit Before Tax because our plants in Goa started passing out from the full tax holiday period.

Now, the period of tax incentives for these plants is over and PGHH pays taxes at the standard corporate tax rate of India. From FY2020 onwards, the company has opted for the new corporate tax regime.

FY2020 annual report, page 109:

The tax rate used for 2019-20 is the corporate tax rate of 25.168%.

Recommended reading: How to do Financial Analysis of a Company

Operating Efficiency Analysis of Procter & Gamble Hygiene and Health Care Ltd:

a) Net fixed asset turnover (NFAT) of Procter & Gamble Hygiene and Health Care Ltd:

The net fixed asset turnover (NFAT) of Procter & Gamble Hygiene and Health Care Ltd (PGHH) in the past has improved from 8.5 in FY2015 to 23.5 in FY2023. The improvement of NFAT indicates that the company has improved its efficiency of asset utilization.

Nevertheless, an asset turnover ratio of 23.5 indicates that the company is using an asset-light approach to manufacturing by relying more on outsourcing its production. For example, it relies on procuring goods from another Indian P&G subsidiary, Procter & Gamble Home Products Pvt. Ltd (PGHP) where it recently changed the contract from toll manufacturing to contract manufacturing.

Going ahead, an investor should keep a close watch on the fixed asset turnover levels of the company to assess if it continues to efficiently utilize its plants.

Further advised reading: Asset Turnover Ratio: A Complete Guide for Investors

b) Inventory turnover ratio of Procter & Gamble Hygiene and Health Care Ltd:

Over the years (FY2014-23), the inventory turnover ratio (ITR) of the company has been in the range of about 15-19. An ITR of 15 and above indicates that the company utilizes its supply chain very efficiently so that only a minimal amount of inventory is there in the system.

In recent years, ITR seems to have improved from 15.7 in FY2021 to 17.3 in FY2023, primarily due to a change in outsourcing arrangement between PGHH and PGHP from toll manufacturing to contract manufacturing.

In toll manufacturing, PGHH used to buy and provide raw materials to PGHP for conversion into finished goods. So, the raw material used to be on the books of PGHH. Whereas in contract manufacturing, PGHP purchases raw material and converts it into finished goods; thereby, removing the raw material from the books of PGHH and leading to improvement in the inventory position of PGHH.

In the past, PGHH has consistently written off inventory for about 7-10 cr every year, which might be probably due to products expired off the shelf or damages during transportation etc. For example, in FY2020 and FY2021, it wrote off inventory worth ₹11.8 cr and ₹10.7 cr respectively.

FY2021 annual report, page 97:

Going ahead, an investor should keep a close watch on the inventory position of the company to understand whether it can maintain the efficiency of its inventory utilization.

Further advised reading: Inventory Turnover Ratio: A Complete Guide

c) Analysis of receivables days of Procter & Gamble Hygiene and Health Care Ltd:

Over the years, the receivables days of Procter & Gamble Hygiene and Health Care Ltd have stayed in the range of 16-21 days. In FY2023, it reported receivables days of 19 days.

Stable receivables days over the years indicate that PGHH has collected its money from its customers on time.

Going ahead, an investor should continue to monitor the receivables position of the company to check if it continues to collect its money on time from its customers.

Further advised reading: Receivable Days: A Complete Guide

When an investor compares the cumulative net profit after tax (cPAT) and cumulative cash flow from operations (cCFO) of Procter & Gamble Hygiene and Health Care Ltd for FY2014-23, then she notices that over the last 10 years (FY2014-FY2023), the company has converted its profit into cash flow from operations.

Over FY2014-23, Procter & Gamble Hygiene and Health Care Ltd reported a total net profit after tax (cPAT) of ₹4,636 cr. During the same period, it reported cumulative cash flow from operations (cCFO) of ₹5,123 cr.

It is advised that investors should read the article on CFO calculation, which would help them understand the situations in which companies tend to have the CFO lower than their PAT. In addition, the investors would also understand the situations when the companies would have their CFO higher than the PAT.

Further advised reading: Understanding Cash Flow from Operations (CFO)

Learning from the article on CFO will indicate to an investor that the cCFO of Procter & Gamble Hygiene and Health Care Ltd is higher than the cPAT due to the following factors:

• Depreciation expense of ₹508 cr (a non-cash expense) over FY2014-FY2023, which is deducted while calculating PAT but is added back while calculating CFO.
• Interest expense of ₹73 cr (a non-operating expense) over FY2014-FY2023, which is deducted while calculating PAT but is added back while calculating CFO.

The Margin of Safety in the Business of Procter & Gamble Hygiene and Health Care Ltd:

a) Self-Sustainable Growth Rate (SSGR):

Read: Self Sustainable Growth Rate: a measure of Inherent Growth Potential of a Company

Upon reading the SSGR article, an investor would appreciate that if a company is growing at a rate equal to or less than the SSGR and it can convert its profits into cash flow from operations, then it would be able to fund its growth from its internal resources without the need of external sources of funds.

Conversely, if any company attempts to grow its sales at a rate higher than its SSGR, then its internal resources would not be sufficient to fund its growth aspirations. As a result, the company would have to rely on additional sources of funds like debt or equity dilution to meet the cash requirements to generate its target growth.

An investor may calculate the SSGR using the following formula:

SSGR = NFAT * NPM * (1-DPR) – Dep

Where,

• SSGR = Self Sustainable Growth Rate in %
• Dep = Depreciation rate as a % of net fixed assets
• NFAT = Net fixed asset turnover (Sales/average net fixed assets over the year)
• NPM = Net profit margin as % of sales
• DPR = Dividend paid as % of net profit after tax

(For systematic algebraic calculation of SSGR formula: Click Here)

Over most of the years, Procter & Gamble Hygiene and Health Care Ltd had an SSGR in negatives. However, the company is able to sustain its growth rate of 7% over the last 10 years (FY2014-23) without any debt.

The answer lies in the fact that the SSGR of PGHH is not negative due to a capital-intensive business model with low-profit margins. On the contrary, its business model is very asset-light with NFAT exceeding 20 and good profit margins. Its SSGR is low/negative because, over the years, PGHH has given large dividend payouts to distribute its surplus cash to shareholders.

Over the years, the dividend payout ratio of PGHH has been very high and has exceeded 100% at times indicating that it distributed cash accumulated over the years to its shareholders. The following is the dividend payout ratio of PGHH for FY2017 to FY2023 sequentially: 292%, 35%, 68%, 79%, 157%, 90% and 89%.

Due to its asset-light business, PGHH was able to maintain its sales growth well within its internal cash flows and was accumulating surplus cash; therefore, it paid out dividends liberally including large special dividends.

An investor arrives at the same conclusion when she analyses the free cash flow position of the company.

b) Free Cash Flow (FCF) Analysis of Procter & Gamble Hygiene and Health Care Ltd:

While looking at the cash flow performance of Procter & Gamble Hygiene and Health Care Ltd for the last 10 years (FY2014-FY2023), an investor notices that it generated cash flow from operations of ₹5,123 cr. During the same period, it made a capital expenditure of about ₹328 cr.

Therefore, during this period (FY2014-FY2023), Procter & Gamble Hygiene and Health Care Ltd had a free cash flow (FCF) of ₹4,795 cr (=5,123 – 328).

In addition, during this period, the company had a non-operating income of ₹498 cr and an interest expense of ₹73 cr. As a result, the company had a total free cash flow of ₹5,219 cr (= 4,795 + 498 – 73). Please note that the capitalized interest is already factored in as a part of the capex deducted earlier.

Procter & Gamble Hygiene and Health Care Ltd used its free cash flow for paying dividends of about ₹4,466 cr and has increased its cash & investment balance by about ₹709 cr from ₹269 cr in FY2014 to ₹978 cr in FY2023.

Going ahead, an investor should keep a close watch on the free cash flow generation by Procter & Gamble Hygiene and Health Care Ltd to understand whether the company continues to generate surplus cash from its business.

Further recommended reading: Free Cash Flow: A Complete Guide to Understanding FCF

Self-Sustainable Growth Rate (SSGR) and free cash flow (FCF) are the main pillars of assessing the margin of safety in the business model of any company.

Further advised reading: 3 Simple Ways to Assess “Margin of Safety”: The Cornerstone of Stock Investing

Additional aspects of Procter & Gamble Hygiene and Health Care Ltd:

On analysing Procter & Gamble Hygiene and Health Care Ltd and after reading annual reports, its credit rating reports and other public documents, an investor comes across certain other aspects of the company, which are important for any investor to know while making an investment decision.

1) Related party transactions of Procter & Gamble Hygiene and Health Care Ltd:

PGHH is one of the group companies of P&G group, USA. Overall, P&G group has four companies in India, three are listed and one is unlisted:

• Procter & Gamble Hygiene and Health Care Ltd (PGHH, listed)
• Procter & Gamble Home Products Pvt. Ltd (PGHP, unlisted)
• Gillette India Ltd (Listed) and
• Procter & Gamble Health Ltd (PGHL, listed, previously Merck Limited)

Out of these, the first three, PGHH, PGHP and Gillette are in the FMCG domain and the fourth one PGHL is in the pharmaceutical business.

On analyzing, an investor notices that P&G group runs its Indian FMCG companies as one single strategic unit with the same management running three companies: PGHH, PGHP and Gillette. Currently, the managing director of PGHH, Mr L. V. Vaidyanathan is also the MD of Gillette and also serves the unlisted entity, PGHP.

As per the FY2023 annual report, the three FMCG companies, PGHH, Gillette and PGHP share his remuneration cost in proportion to their sales.

FY2023 annual report, page 56:

Mr. L. V. Vaidyanathan is paid by the Company and portion of the remuneration is cross charged to P&G Group Companies, Gillette India Limited and Procter & Gamble Home Products Private Limited in proportion to their respective Net Outside Sales.

In the past, managing directors, Mr S Khosla and Mr Madhusudan Gopalan also looked after all three FMCG companies.

FY2012 annual report, page 44:

The re-appointment of Mr. Khosla as the Managing Director of the Company is notwithstanding the fact that he has been re-appointed as the Managing Director of Procter & Gamble Home Products Limited and Gillette India Limited

FY2020 annual report, page 41:

Mr. Madhusudan Gopalan is paid by the Company and portion of the remuneration is cross charged to Gillette India Limited and Procter & Gamble Home Products Private Limited in proportion to their respective Net Outside Sales

All the P&G group companies share common infrastructure for services like IT, accounting, secretarial, purchasing systems etc. and divide expenses among each other as “Business Process Outsourcing Expenses”.

Transcript of AGM, November 2022, page 31:

Business Process Outsourcing Expenses…These are the cost of shared services that your company uses but which are incurred centrally…Information Technology Services, Accounting Services, Purchasing Systems, Secretarial Services and so on.

When the management of P&G looks at all the FMCG companies as one single pool of resources like three departments of a single company, then it keeps moving brands, manufacturing activities, money etc. from one company to another.

Let us see some of the instances of such transfer of assets/resources from PGHH to other companies P&G group.

1.1) Loans given by PGHH to other P&G companies, using it like a bank:

Over the years, P&G Group has used Procter & Gamble Hygiene and Health Care Ltd as a bank due to its surplus cash-generating ability.

As per the latest data, on Dec. 31, 2023, it has given about ₹350 cr. to P&G affiliate companies. As per the cash flow statement disclosed by PGHH with its Q2-FY2024 results, during the last 6 months, it gave ₹700 cr to its affiliate companies and received ₹350 cr back indicating that ₹350 cr is outstanding.

Q2-FY2024 results, page 4:

In the past, P&G group companies have taken substantial sums of money from PGHH whenever they needed it. For example, in FY2014, as per the related party transactions section of the annual report, P&G group companies took loans of more than ₹2,200 cr from PGHH.

FY2014 annual report, page 57:

Out of these, loans of ₹1,911 cr were taken by Procter & Gamble Home Products Private Limited (PGHP), which is the unlisted, wholly-owned subsidiary of P&G group.

1.2) Transfer of brands, manufacturing plants etc. from one group company to another:

Initially, Procter & Gamble Hygiene and Health Care Ltd used to sell detergents as well (currently, P&G has Ariel and Tide brands of detergents). However, in FY1993, PGHH sold its detergent brands to the unlisted FMCG company of P&G group, Procter & Gamble Home Products (PGHP). (Source: IndiaInfoline)

During the year 1993, P&G had divested the Detergents business to Procter & Gamble Home Products.

However, PGHH continued to manufacture detergents at its Mandideep plant in Madhya Pradesh for PGHP. At one point in time, contract manufacturing of detergents for PGHP was one of the largest revenue sources for PGHH.

In FY2005, the soaps and detergents segment, which included contract manufacturing of detergents for PGHP constituted about 45% (₹331 cr) of its overall sales (₹738 cr).

FY2005 annual report, page 22:

All the P&G FMCG companies share the same sales network and they share their expenses. So, it is the same salesperson who goes to the distributor and retailers to sell the detergent whether it is marketed by PGHH or PGHP. So, irrespective of the entity, the work of the selling channel is the same.

Therefore, such transactions of transferring marketing rights from one group entity to another are usually ways to transfer different steps of value addition to the desired entity. In this case, if the marketing of detergents was a higher value-adding activity than manufacturing them, then by shifting brands to PGHP and keeping manufacturing in PGHH, the P&G management might have ensured that PGHH is left with only low-margin contract manufacturing part and high-margin marketing part goes to unlisted PGHP.

In FY2006, P&G group transferred the Mandideep plant, which manufactured detergents, from PGHH to PGHP; effectively removing the detergent business from PGHH.

FY2005 annual report, page 3:

Effective October 1, 2005 your Company has transferred non-core detergent manufacturing business to Procter & Gamble Home Products Limited… this transfer though will impact the top- line by over Rs. 200 crores annually

Until FY1999, Procter & Gamble Hygiene and Health Care Ltd used to manufacture shampoos for the unlisted, wholly owned subsidiary of P&G group, PGHP. Currently, P&G has shampoo brands like Heads & Shoulders, Pantene and Rejoice.

FY1999 annual report, page 3:

The manufacturing arrangement which your Company has with Procter & Gamble Home Products Limited (PGHP) for shampoo manufacture will be terminated during the current year

Such transfer of money, resources and assets from one company to another may seem perfect without any issues if all the companies are wholly-owned subsidiaries or private entities of P&G group. However, when some entities like PGHH and Gillette are listed with stakes owned by public shareholders, then each of these transactions opens up avenues where economic benefits can be transferred from public shareholders of one listed company to shareholders of other entities.

1.3) Large sales, purchases, expense sharing, reimbursements between P&G companies:

As mentioned earlier, P&G Group seems to consider all its entities as different segments of a single strategic entity. As a result, it manages many business functions centrally and then expenses are allocated among companies.

In addition, the P&G management bifurcates the overall value-addition chain of manufacturing and marketing a product between different companies probably based on its preferences about in which entity it plans to keep maximum profits.

As a result, each P&G company e.g. PGHH ends up making a large amount of sales, purchases and expense sharing with other group entities.

For example, as per the FY2023 annual report, pages 132-133, in FY2023, PGHH had related party transactions of more than ₹1,500 cr with other P&G group entities. These transactions included the purchase of goods of ₹760 cr, reimbursement of shares expenses both paid and received of more than ₹550 cr, and processing charges of more than ₹150 cr.

As discussed earlier, such transactions are ok if all the companies are wholly-owned subsidiaries or private entities of the P&G group. However, when some of the entities are listed, then each of these transactions provides avenues for transferring economic benefits from shareholders of the listed entity to other entities.

For example, the management may make the listed entity sell goods to the unlisted entity at a discount to the market price or make it purchase goods from the unlisted entity at a premium to the market price. Such transactions can transfer economic benefits from the minority shareholders of the listed company to the shareholders of the unlisted entity.

Moreover, when asked about any plans for a merger of the unlisted company (PGHP) with the listed entities, which may remove many of the above-perceived issues, the management has denied it stating that the current structure is working well for them.

Transcript of analyst meeting, September 2023, page 9:

Plans to merge with other unlisted entities in India…we can’t comment on this price sensitive information, our current corporate structure in India is delivering strong results.

Also read: How Promoters benefit from Related Party Transactions

1.4) Royalty payments:

Currently, P&G group charges Procter & Gamble Hygiene and Health Care Ltd a royalty of more than 5% of its sales. As per the FY2023 annual report, page 116, PGHH paid a royalty of ₹212 cr on its sales of ₹3,918 cr, which is about 5.4%.

Over the years, the royalty payment as a percentage of sales has gone up significantly.

In FY1996, PGHH paid a royalty of 1.8% (₹6.67 cr) on sales of ₹366 cr. (FY1997 annual report, page 13).

In FY2005, the rate of royalty payment by PGHH increased to 2.4% (₹17.8 cr) on sales of ₹738 cr (FY2005 annual report, page 20.

In FY2006, the royalty rate increased to 4.1% (₹24.5 cr) on sales of ₹597 cr (FY2006 annual report, page 22.

In FY2007, PGHH paid a royalty rate of 4.9% (₹27 cr) on sales of ₹553 cr (FY2007 annual report, page 24).

As per the company, it pays royalty to the global parent company for technology and trademark utilization. PGHH does not spend any money on research and effectively pays royalty to the parent company to benefit from its research activities.

FY2023 annual report, page 15:

Company has not incurred any expenditure on research and development during the Financial Year.

However, as the royalty payments have consistently increased from 1.8% to now more than 5% of sales; an investor may make her own opinion on whether royalty is a mechanism by the parent company to benefit ahead of other shareholders who only get dividends from the company.

1.5) Related party transactions with employees/relatives:

In the past, there have been cases where Procter & Gamble Hygiene and Health Care Ltd entered into transactions with relatives of its senior management.

For example, in FY2003, PGHH took on rent a flat from Ms. Sheela Patel who was the wife of its then chairman, Mr B V Patel.

FY2003 annual report, page 25:

Mrs Sheela Patel, wife of Mr B V Patel was paid rent at market rates for letting out her flat to the Company

An investor would appreciate that such transactions of the company with its management, which are not a part of their remuneration contract, may open up channels for passing undue benefits to employees and hamper the alignment of interests of the management and shareholders.

Also read: Are professionally managed companies safer for shareholders?

2) Risk of global parent favoring unlisted entity over PGHH:

As mentioned earlier, when the business of P&G in India is spread in listed as well as unlisted entities and P&G runs these companies like divisions of one single strategic entity, then there is always a risk that while taking strategic decisions like allotment of new brands, products or higher value-adding businesses, the parent may prefer the wholly-owned unlisted entity over public listed entities.

This is because in the listed entity, other than the global parent, various other public shareholders are also present with whom the global parent would have to share the fruits of the business. Whereas, from the perspective of the global parent, such business decisions hardly make any on-ground implementation changes because all the P&G FMCG entities in India have the same management (Managing Director etc.), same sales force, procurement, administration, IT teams etc.

So, the work for the global parent is the same whether it launches a new product/brand in the listed entity or the unlisted, private entity. But, in the case of a listed entity e.g. PGHH, it will have to share about 30% of profits with others/public/minority shareholders (holding 29.36% stake in PGHH), whereas it can keep 100% of profits with itself if it launches the product in a private, unlisted, wholly-owned subsidiary, PGHP.

Therefore, shareholders of Procter & Gamble Hygiene and Health Care Ltd always face the risk of the global P&G parent favouring other entities than PGHH.

For example, recently, P&G group has announced a ₹2,000 cr capex in Gujarat for its export business of digestives (Source: P&G India to invest ₹2,000 crore to set up export hub in Gujarat: Livemint).

For this capex, the management of P&G has clearly said that this capex is not a part of PGHH.

Transcript of analyst meeting, September 2023, page 12:

The recently announced capex of Rs. 2000 Cr in digestives for exports will be done under P&GHH, if Yes, then by why it would get completed: The announcement pertains to a different legal entity.

In the past, while launching brands like Pampers, P&G preferred its unlisted, wholly-owned entity, P&G Home Products (PGHP) to PGHH despite baby diapers and sanitary napkins being common categories for many of its peers. (Source: P&G unveils $6 bn diaper brand in India: Economic Times, Dec. 12, 2006)

Therefore, investors of Procter & Gamble Hygiene and Health Care Ltd should always be aware of this aspect while assessing future perspectives of the company.

Also read: Steps to Assess Management Quality before Buying Stocks

3) Weakness in processes and controls at Procter & Gamble Hygiene and Health Care Ltd:

There are a few instances in the past that indicate the processes and controls at PGHH leave scope for improvement.

For example, in FY2023, the company appointed an independent director who was more than 75 years of age; however, it did not take prior approval from shareholders for his appointment. Due to this noncompliance, NSE and BSE put a monetary penalty on PGHH.

FY2023 annual report, page 49:

except while appointment Mr. Gurcharan Das as an additional Independent Director…age of 78 years on the date of appointment, the Company has not taken prior approval of shareholders…both the Stock Exchanges imposing penalty of ₹ 1,06,200/- each.

In the past, on multiple occasions, PGHH delayed the deposit of undisputed statutory dues to govt. authorities.

For example, as per the FY2012 annual report, page 22, it did not deposit TDS (tax deducted at source) to govt. authorities even after 6 months when it became due.

In FY2007, it delayed the deposit of TDS as well as dues for IEPF (Investors Education Protection Fund) for more than 6 months (FY2007 annual report, page 17).

In FY2001, it delayed the deposit of TDS to govt. authorities for more than 6 months (FY2001 annual report, page 13).

Such payment delays by PGHH for undisputed dues are not only limited to statutory dues. Currently, the company has undisputed trade payables that have been pending for payment for more than three years. Payables of more than ₹7 cr are pending for payment for more than one year even when there is no dispute about PGHH’s liability for payment.

FY2023 annual report, page 113:

4) Certain business decisions of Procter & Gamble Hygiene and Health Care Ltd:

4.1) Intercorporate deposits:

During the initial part of its financial history for which annual reports are available (since 1997), significant sums of money moved out of the company as intercorporate deposits (ICDs). These deposits were not loans to related parties/P&G group companies as they were not mentioned in the related party transaction section of annual reports.

In FY1996, the company had given ICDs of about ₹18 cr (FY1997 annual report, page 19). However, at times, PGHH had put substantial sums of money into these ICDs. For example, in FY2002, the company had paid out ₹103 cr as ICDs.

FY2002 annual report, page 17:

As per the FY2008 annual report, page 24, PGHH had ₹94 cr of ICDs outstanding on June 30, 2008. The company continued to give ICDs until FY2010 when it received its ₹72 cr of ICDs back and the outstanding balance became zero.

An investor may contact the company directly to understand who was the counterparty to whom it had given these ICDs and why it preferred ICDs as a method of deploying cash instead of using it for investment in the business or as dividend payment to shareholders.

4.2) Manufacturing plant, Honda, Goa:

Originally, Procter & Gamble Hygiene and Health Care Ltd had two manufacturing plants in Goa, Kundaim and Honda.

In FY2002, the company moved manufacturing activities from the Honda plant to Kundaim for cost efficiency. The management said that it plans to optimally utilize this plant’s assets including their sale.

FY2002 annual report, page 2:

During the year, the manufacturing operations at Honda, Goa were consolidated into the factory at Kundaim, Goa…We are examining ways to optimize use of assets of the Honda facility including its sale.

However, the management could not make any optimal use of the plant’s assets and the next year, in FY2003, it wrote down (impaired) its value by about ₹10.5 cr.

FY2003 annual report, page 24:

Company had discontinued the production at Honda plant…value of the assets at Honda plant has been written down by Rs 10 46 59 317

Thereafter, in FY2010, PGHH once again impaired its plant by ₹5.6 cr. However, it did not mention, which plant it has impaired in the year.

FY2010 annual report, page 23:

During the year, Plant & Machinery has been impaired at its plant sites amounting to ₹ 5 63 14 749 (Previous year: ₹ Nil).

Subsequently, in FY2018, the company intimated to its shareholders that it had impaired its redundant plant further by ₹12.6 cr. and is now classifying it as “held for sale.”

FY2018 annual report, page 69:

Certain Property, Plant and Equipment have been tested for impairment and a loss amounting to ₹1 259 lakhs has been recognized…These were rendered redundant due to Company moving its manufacturing facility from one location to another. The said assets are now being classified as ‘Held for sale’

In FY2020, the management further impaired its Honda plant by ₹13.9 cr.

further impairment loss amounting to ₹1 388 lakhs has been recognized…company intends to dispose off the said PPE…continue to be classified as held for sale as at June 30, 2020.

In FY2021, even after about 20 years since the Honda plant was made redundant, the management could not find an optimal solution for the same and it fully impaired the plant.

FY2021 annual report, page 89:

…these assets have been fully impaired…and an impairment loss amounting to ₹764 lakhs has been recognized…continue to be classified as held for sale…since the management intends to dispose off these assets

As per the latest annual report, in FY2023, the plant is yet to be sold/disposed of.

FY2023 annual report, page 106:

assets continue to be classified as held for sale as at June 30, 2023, since the management intends to dispose off these assets

An investor may contact the company directly to understand the reasons why it could not sell the Honda plant even after more than 20 years when it went out of use and as a result, it had to be fully impaired.

Also read: How to Identify if Management is Misallocating Capital

4.3) Impairment of land:

Usually, land is an asset that is not impaired as it retains its value as land can always be put to different uses.

However, in FY2004, Procter & Gamble Hygiene and Health Care Ltd impaired one of its land parcels in Hyderabad.

FY2004 annual report, page 24:

During the year the value of land at Hyderabad has been impaired by Rs 1 27 59 715.

An investor may contact the company directly regarding this impairment of land and what circumstances led to the land losing its value substantially.

In addition, at times, the management of PGHH could not put up a proper supply chain of raw materials and as a result, its sales suffered.

For example, in FY2001, sales of Vicks Vaporub suffered as the management could not source its packaging at peak season for its demand leading to a loss of business.

FY2001 annual report, page 2:

VICKS VAPORUB sales declined by 4% mainly due to supply constraints of the new 10 gm plastic flat pack during the peak colds season (viz October to January) last year.

5) Management Succession of Procter & Gamble Hygiene and Health Care Ltd:

Procter & Gamble Hygiene and Health Care Ltd is a part of the P&G group and has access to a large pool of professional managers across its different companies globally. The company has a history of appointing as managing directors, people who have been with P&G group for more than a decade and have worked across different countries.

Therefore, over the years, P&G group has provided continuity in leadership to PGHH and it does not depend on any promoter family for succession planning.

Further advised reading: How to do Management Analysis of Companies?

6) Data presented in the annual report:

In many annual reports, in the cash flow statement, Procter & Gamble Hygiene and Health Care Ltd classified interest/finance expenses as an outflow under cash flow from operating activities (CFO) whereas the usual convention is to classify it as an outflow under cash flow from financing activities (CFF).

For example, in the FY1997 annual report, on page 19, PGHH included interest paid as an outflow in CFO.

The company continued this practice of including interest paid as an outflow under CFO until FY2004 and from FY2005 onwards, it started classifying interest paid as an outflow under CFF.

In the recent annual reports, PGHH has clubbed a large amount of expenses as “miscellaneous expenses” under the note “other expenses” without providing details of what these substantially large expenses pertain to.

For example, in FY2023, PGHH disclosed miscellaneous expenses of ₹96.5 cr and in FY2022, it was ₹76.3 cr (FY2023 annual report, page 116).

In FY2021, miscellaneous expenses were ₹84.4 cr and in FY2020, it was ₹70.2 cr (FY2021 annual report, page 97).

For any information on the break-up of miscellaneous expenses, an investor may contact the company directly.

The Margin of Safety in the market price of Procter & Gamble Hygiene and Health Care Ltd:

Currently (March 15, 2024), Procter & Gamble Hygiene and Health Care Ltd is available at a price-to-earnings (PE) ratio of about 67 based on consolidated earnings of the last 12 months (January 2023 to December 2023).

Moreover, we recommend that an investor read the following articles to assess the PE ratio to be paid for any stock, which takes into account the strength of the business model of the company as well. The strength in the business model of any company is measured by way of its self-sustainable growth rate and the free cash flow generating the ability of the company.

In the absence of any strength in the business model of the company, even a low PE ratio of the company’s stock may be signs of a value trap where instead of being a bargain; the low valuation of the stock price may represent the poor business dynamics of the company.

• 3 Principles to Decide the Ideal P/E Ratio of a Stock for Value Investors
• How to Earn High Returns at Low Risk – Invest in Low P/E Stocks
• Hidden Risk of Investing in High P/E Stocks

Analysis Summary

Overall, Procter & Gamble Hygiene and Health Care Ltd (PGHH) has grown its sales at a rate of about 7% over the last 10 years (FY2014-2023). During this period, the operating profit margin (OPM) has fluctuated significantly between 20% to 29%. This is due to intense competition faced by PGHH from financially strong large MNCs, and Indian players as well as from pirated, fake and lookalike products.

The presence of equally good products from other MNCs provides a lot of choices to customers, which has impacted the pricing power of PGHH. As a result, it cannot pass on an increase in input costs to customers without factoring in affordability. At times, it had to take a significant hit on its profitability when raw material prices increased sharply because it could not pass it on to customers.

Moreover, because of easy replaceability by customers, the company has to continuously spend a large amount on advertisement and business promotion to stay in the minds of customers. Otherwise, the company faces a high risk of losing market share. In the past, the company faced periods where demand for its products declined and it had to spend aggressively on advertisements to revive demand.

However, due to intense competition, it could not pass on the impact of increased advertising costs to customers and had to take a hit on its profitability. Therefore, for PGHH, it has become a game of choosing between high advertisement spending-led growth with lower profit margins or cutting down on advertisements to increase profitability but then losing on sales growth. So, at different times in the past, the company had to choose between high growth or high profitability.

Due to strong price-based competition, the company has to improve its operating efficiency and cut down on costs to improve its profitability. As a result, it removed less profitable brands from its portfolio, closed down inefficient plants, and changed outsourcing arrangements to save on costs. It relies more on outsourcing of manufacturing as well as workforce to run an asset-light business model. At one point, during FY1998-2008, the company had reduced its workforce by two-thirds.

The company had to continuously find ways to increase productivity through supply chain, distribution process improvements and optimization of advertising spending.

Due to a focus on asset-light business and good working capital efficiency, Procter & Gamble Hygiene and Health Care Ltd has generated a lot of surplus cash from its operations. As the company has not invested money in any large capital expenditure; therefore, over the years, it has paid out large dividends to its shareholders.

However, at times, the company has used its surplus cash to provide financial support to other P&G group companies. It is like PGHH has acted as a banker to these companies by giving loans of more than ₹2,000 cr to them whenever they had a requirement of funds.

Global P&G management treats all its Indian subsidiaries involved in the FMCG business as one unit i.e. like different divisions of the same strategic unit. Therefore, all Indian P&G subsidiaries whether listed or unlisted, have the same senior management i.e. same person as the managing director. Therefore, P&G keeps on freely moving money and material between Indian subsidiaries.

Over the years, P&G management has shifted brands and manufacturing plants from PGHH to its unlisted, private, wholly-owned subsidiary, P&G Home Products (PGHP). It has also preferred PGHP while introducing new brands and products in India. One of the reasons for the same may be that P&G can have full benefits of all the profits of business done in the unlisted entity whereas it has to share a part of profits with minority/public shareholders if it launches any product/brand in the listed companies like PGHH.

In addition, P&G Group manages the business functions of all the subsidiaries centrally. Therefore, there are numerous large related party transactions of PGHH with other entities like purchase and sale of goods, reimbursement of expenses, process charges etc., which at times have exceeded ₹1,500 cr annually.

P&G global entities provide research & development support and technology to PGHH and in return charge royalty. Over the years, royalty payments by PGHH have increased from less than 2% to now, more than 5%. An investor may assess whether royalty payments are a method of the global P&G companies to benefit ahead of other shareholders.

At times, decisions of the management of PGHH indicated that there is a scope for improvement in processes, controls etc. Once, it did not take shareholders’ approval before appointing an elderly person as an independent director even though it was legally required. At other times, it delayed undisputed payments to govt. authorities as well as other suppliers.

The management closed down its Honda plant in FY2002; however, it seems that thereafter, it forgot about it. Subsequently, in FY2018, it was like the management remembered this plant and then started writing its assets down and by FY2021, fully impaired it while claiming that it intends to sell it off. However, despite a passage of more than 20 years (since FY2002), the management has yet to do any optimal use/sale of the Honda plant.

Going ahead, an investor needs to keep a close watch on the competitive intensity and pricing power of the company. It needs to monitor if the company’s products are able to gain genuine customer interest or if the company is pushing the products in the market with the force of high advertisement spending. She needs to check on the productivity improvement steps taken by the management and whether it is able to maintain asset utilization and working capital efficiency.

The investor needs to see if global P&G management favours its private, unlisted entity over PGHH for launching new brands/products or treats it as a stable cash flow source to receive dividends, which it reinvests in its other entities.

She needs to continuously monitor related party transactions of PGHH with other P&G group companies because each of these transactions opens up avenues for shifting economic benefits from public/minority shareholders to global P&G shareholders.

Further advised reading: How to Monitor Stocks in your Portfolio

These are our views on Procter & Gamble Hygiene and Health Care Ltd. However, investors should do their own analysis before making any investment-related decisions about the company.

You may use the following steps to analyse the company: “Selecting Top Stocks to Buy – A Step by Step Process of Finding Multibagger Stocks”

I hope it helps!

Regards,

Dr Vijay Malik

P.S.

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Disclaimer

Registration status with SEBI:

I am registered with SEBI as a research analyst.

Details of financial interest in the Subject Company:

I do not own stocks of the companies mentioned above in my portfolio at the date of writing this article.