MOSL: P&G HYGIENE AND HEALTHCARE (Neutral)-Healthy operating performance, fair valuations

​P&G Hygiene and Healthcare: Healthy operating performance, fair valuations

(PG IN, Mkt Cap USD4.4b, CMP INR8729, TP INR9267, 6% Upside, Neutral)

• 1QFY18 (June year-end) net sales grew 9.5% YoY (est. of -2.4%) to INR6.6b. EBITDA grew impressively by 24.0% YoY (est. of +19%) to INR1.15b. Adj. PAT rose 10.6% YoY (est. of +11.5%) to INR1.16b. Management called out a strong performance in the feminine hygiene and healthcare segments.
  
• EBITDA margin expanded 330bp YoY to 28.5% in 1QFY18. The company recorded operating margin expansion, despite gross margin contraction of 50bp YoY to 57.8%. Other expenses increased 30bp YoY as % sales, but there was an 180bp/230bp reduction in staff costs/A&P. While some of the gains were attributed to lower costs due to GST accounting, we expect A&P to be higher for the rest of the year.
  
• Other income declines sharply: As a result of the massive INR12b dividend payout toward the end of FY17, other income declined sharply to INR35m in the quarter from INR225m in 1QFY17. We note that the decline, albeit expected, was sharper than our estimate. PAT (in-line) growth was therefore not as impressive as EBITDA growth.
  
• Valuation view: There is no material change to our EPS forecast. In our view, two factors make PGHH a highly attractive long-term core holding: (1) huge category growth potential in the feminine hygiene segment (~70% of sales) and potential for market share growth because of its considerable moats - a combination of which provides it with a significant competitive advantage versus other consumer peers, and (2) potentially huge margin gains from premiumization over the longer term in feminine hygiene. With the payout of the huge cash pile, RoCEs have more than doubled and investor concerns have been addressed. Moreover, unlike peers, P&GHH (June year-end) had the disadvantage of both demonetization and GST-led down-stocking in the same year. It should thus enjoy a highly favorable base going forward. Nevertheless, near-term valuations appear expensive due to lower other income in FY18/FY19E v/s earlier years. While PGHH remains one of our top long-term picks, valuations of 49.4x/41.7x FY19/FY20E EPS are fair. Maintain Neutral.