Initiating Coverage |25 April 2016
Sector: Consumer
P&G Hygiene and Health Care
Large opportunity; high barriers to entry
Krishnan Sambamoorthy
(Krishnan.Sambamoorthy@MotilalOswal.com); +91 22 3982 5428
Vishal Punmiya
(Vishal.Punmiya@MotilalOswal.com); +91 22 3980 4261
Investors are advised to refer through important disclosures made at the last page of the Research Report.
Motilal Oswal research is available on www.motilaloswal.com/Institutional-Equities, Bloomberg, Thomson Reuters, Factset and S&P Capital.

P&G Hygiene and Health Care
Contents: P&G Hygiene and Health Care | Large opportunity
Summary ............................................................................................................. 3
Several years of strong growth ahead ................................................................... 5
Operating leverage to improve profitability ........................................................ 18
Cash Flows improving ......................................................................................... 22
Quarterly performance ....................................................................................... 23
Initiating coverage with Buy ............................................................................... 25
BULL & BEAR Case .............................................................................................. 27
Risks and concerns ............................................................................................. 29
Company background ......................................................................................... 32
Financials and Valuations ................................................................................... 34
April 2016
2

P&G Hygiene and Health Care
BSE Sensex
25,838
S&P CNX
7,899
Initiating Coverage | Sector: Consumer
P&G Hygiene and Health Care
CMP: INR6,402
TP: INR7,690 (+20%)
Buy
Large opportunity; high barriers to entry
Stock Info
Bloomberg
Equity Sh (m)
52-Wk Range INR
1, 6, 12 Rel. Per (%)
M.Cap. (INR b)
M.Cap. (USD b)
12M Avg Val (INR M)
Free float (%)
PG
32.5
6982 / 5171
-1/10/2
Low penetration I Weak competition I Category development
206.5
3.1
51
25.4
Financial Snapshot (INR Billion)
Y/E June
2016E 2017E 2018E
Sales
25.6
29.6
35.5
EBITDA
6.0
6.9
8.3
NP
4.2
4.6
5.6
EPS (INR)
128.9 142.6 171.0
EPS Gr.(%)
21.0
10.6
19.9
BV/Sh. (INR) 442.3 513.0 597.6
P/E (x)
49.7
44.9
37.4
P/BV (x)
14.5
12.5
10.7
EV/EBITDA
32.8
28.4
23.2
EV/Sales (x)
7.7
6.6
5.4
RoE (%)
31.4
29.9
30.8
RoCE (%)
31.8
30.2
31.1
Shareholding pattern (%)
Dec-15 Sep-15 Dec-14
Promoter
70.6
70.6
70.6
DII
10.1
10.6
11.5
FII
3.3
2.5
2.0
Others
16.0
16.3
15.8
FII Includes depository receipts
P&G Hygiene and Health Care (PGHH) should continue seeing strong volume growth
in the Feminine Hygiene segment for several years, given low product penetration,
greater affordability post price cuts, growing distribution reach, unmatched category
development efforts and distinct competitive advantages. We expect steady growth
in its other segments as well.
Having hit a trough in FY13 due to price cuts, operating margin is expanding, led by
healthy volume growth, selective price hikes and operating leverage. We expect
healthy and sustainable EPS CAGR of 20% over the medium to long term, driven by
strong revenue growth and operating leverage.
We initiate coverage with a Buy rating and a target price of INR7,690
.
Volume growth in Feminine Hygiene segment to stay strong:
Strong volume
growth in the Feminine Hygiene segment (65% of FY16E sales) is being driven by a
combination of (a) extremely low category penetration (~16%), with rural
penetration in single-digits, (b) earlier price cuts boosting product affordability, (c)
growing distribution reach, and (d) PGHH passing on the benefit of excise duty cut
by the central government from 9% to 1% and VAT reduction by state
governments to consumers. In the past few years, its
Whisper
brand has posted
strong volume growth and its market share has risen to ~56%. Given the abysmally
low penetration, we expect several years of strong volume growth in what is an
essential product for a large segment of the population.
Far ahead of competition:
Johnson & Johnson (Stayfree and
Carefree
brands;
~28% market share) does not have PGHH’s dedicated focus (J&J’s Feminine
Hygiene segment accounts for only ~16% of its total India revenue against 65% for
PGHH) 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 less than 2% market share
and has limited distribution reach. All the large global players are already present
in India and there is no significant local player. Worldwide, private labels have had
low success in this category. Due to its advantages over peers, PGHH could gain
much higher share in a rapidly growing market (not factored into our forecasts
until FY18, up to which we are assuming growth in line with market).
Further increase in distribution reach to raise entry barriers:
PGHH’s products
across its categories reach only 1.3m-2m outlets in India, a fraction of its parent’s
reach of 6m-6.2m outlets in the country. While its reach has expanded significantly
in the last few years, there is still considerable growth potential, given the
increased product affordability. With low priced units in both Feminine Hygiene
and Healthcare, PGHH is well placed from an SKU perspective. Currently, the rural
3
Large opportunity; high
barriers to entry
P&G Hygiene and
Health Care
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April 2016

P&G Hygiene and Health Care
Stock Performance (1-year)
markets account for just ~20% of its Feminine Hygiene product sales. This should
increase, as the product is now highly affordable.
Unmatched category development efforts:
PGHH has had a significant head start
with its unparalleled category development efforts in schools and villages. Only
Colgate-Palmolive (India) in the oral care segment surpasses PGHH’s category
development efforts in the entire consumer sector. For the past few years, PGHH
has been running a program called
Parivartan
in schools across India, educating
menstruating schoolgirls about the need for better hygiene. Through its
disproportionate focus on the ‘point of market-entry customer’, it has reached
4m-5m schoolgirls each year in 15,000 schools across the country in the each of
the past three years including FY15 (June year-end). In a category where overall
penetration is around 16% and rural penetration is in single digits, the benefits of
such efforts are massive.
Initiating coverage with Buy:
PGHH’s current P/E multiples are in line with other
Consumer MNCs, despite its distinct advantages over peers – (1) it is in a much
faster growing category, and (2) it enjoys far superior barriers to entry in its key
Feminine Hygiene segment. Its ongoing distribution expansion and unmatched
category development efforts will only enhance the entry barriers. PGHH could
compound its revenue manifold by gaining share in an ever increasing pie. Its
earnings growth prospects are superior to peers. We expect ~20% EPS CAGR over
the medium to long term. PGHHHH’s balance sheet is healthy, with negative
working capital and RoE of over 30% and RoIC of over 100%. These metrics call for
a significant premium to peer valuations. We assign a target multiple of 45x FY18E
EPS – 10% premium to the average one-year forward multiple of the last three
years. This results in a target price of INR7,690 – 20% upside.
April 2016
4

P&G Hygiene and Health Care
Several years of strong growth ahead
Feminine Hygiene the key driver
Low penetration presents huge growth opportunity
Earlier price cuts have boosted affordability
Potential increase in distribution through P&G Home Products’ reach
Unique category development efforts
Weak competition
Penetration low; huge growth opportunity in Feminine Hygiene
Feminine Hygiene is among the most under-penetrated segments in the Consumer
space. According to market research firm, AC Nielsen’s data, Feminine Hygiene
market penetration was only 11% in 2011. While product affordability was an issue
earlier, this is no longer the case, with the price per pad declining sharply over the
past few years. Despite strong volume growth in the past few years, penetration is
low at ~16%. This is much lower than other emerging markets like China and
Thailand (50-60%), Indonesia (over 80%) and Kenya (~30%), and in line with Uganda
and Tanzania (~16% each). In developed countries like the US, UK and Germany, the
penetration levels are 90-95%.
Exhibit 1: Feminine Hygiene penetration in India is at extremely low levels
Segment-wise FMCG industry penetration (%)
99
99
94
91
88
81
69
68
41
31
25
16
15
10
11
5
4
Source: Nielsen, Company, MOSL
Such low levels of penetration are usually witnessed in categories that are relatively
discretionary in nature and not in a category like sanitary napkins, which are
essential to a large segment of the population.
We can also arrive at a 16.2% penetration level through the following exercise,
starting from Central Statistical Organization (CSO) data on female population in
India in the age group of 15-45 years.
April 2016
5

P&G Hygiene and Health Care
Exhibit 2: Feminine Hygiene market penetration calculation
Market penetration calculation
Available market size for category (m)
Population above poverty line (m)
Total pad requirement in one cycle
Average total cycles in a year
Average cost of one pad (INR)
Costs incurred per year (INR)
Total market potential (INR m)
PGHH’s segmental sales in FY16E (INR m)
PGHH’s market share (%)
Current market size (INR m)
Market penetration (%)
310
186
11
13
7
1001
186,186
16,890
56%
30,161
16.2%
Source: CSO, MOSL
Penetration even in urban areas is below 30% and is likely to be in low single digits
in rural areas.
We have looked only at the penetration data in the report so far. In terms of per
capita consumption too, India ranks very low. In fact, in the entire Eastern Europe,
Middle East and Africa and South Asia region, only Pakistan has lower per capita
consumption according to P&G’s own data. Among other BRIC nations, the per
capita consumption is 25x higher in Russia and 10x higher in South Africa.
With higher product affordability, rising distribution reach of incumbents, increasing
education and income levels among females, rapid urbanization, rising proportion of
working women, higher product awareness through media, breaking of taboos and
category development efforts by companies like PGHH, usage is picking up in what is
an essential product for a large segment of the population. Given the low
penetration, we expect strong volume growth to continue for several years. The
confluence of company initiatives and favourable social factors should drive rapid
growth in the category.
Affordability increasing with price cuts, driving volume growth
Over FY09-11, PGHH, already a market leader in the segment, decided to cut
product prices unilaterally to boost affordability, a move followed by its
competitors. Price cuts of 25-40% across categories resulted in strong volume
growth since then. The central government cut excise duty on the product from 9%
to 1% over the period, and in FY12, various state governments reduced VAT on the
product from 14-15% to 4%-5%. PGHH passed on the benefits to consumers, further
boosting affordability.
Volume growth in the Feminine Hygiene segment has averaged at ~ 15% YoY for the
past 20 quarters. Given that market penetration can continue to grow at a rapid
pace for many years to come, we continue to expect ~15% volume growth for the
next few years. Very few categories in the Indian Consumer sector are witnessing
such strong volume growth.
April 2016
6

P&G Hygiene and Health Care
Exhibit 3: Average volume growth…
Companies
Asian Paints
Colgate (Toothpaste)
Dabur
Godrej Consumer – Soaps
GSK Consumer
Hindustan Unilever
ITC (cigarette)
Marico – Parachute
Marico - Hair Oil
Marico – Saffola
PGHH - Feminine Hygiene
20-quarter average volume growth (%)
9.9
9.0
8.8
7.8
6.1
6.6
-2.4
7.7
17.1
8.4
~15.0
Source: Company, MOSL
Exhibit 4: …and average revenue growth significantly ahead of peers
Consumer
Asian Paints
Colgate
Dabur
Godrej Consumer
GSK Consumer
Hind. Unilever
ITC
Marico
PGHH
20-quarter average sales growth (%)
14.6
13.6
17.0
24.7
14.1
10.7
12.1
15.5
21.7
Source: Company, MOSL
Exhibit 5: VAT rates on sanitary napkins
State
Maharashtra
Tamil Nadu
Goa
Madhya Pradesh
Gujarat
Orissa
VAT rate (%)
5
5
0
5
5
5
Source: Media, MOSL
Widening distribution reach
Increased affordability has broadened the potential reach of PGHH’s products in the
Feminine Hygiene segment. While distribution of PGHH’s products has improved in
the last few years, also aided by price cuts in Feminine Hygiene, there is plenty of
scope for further expansion.
Vicks Cough Drops
reaches 2m outlets,
Vicks Vaporub
around 1.2m outlets and
Whisper
reaches around 1.3m outlets. This is only a
fraction of P&G Home Products’ existing reach in India, which at over 6m outlets
(direct reach: 1.5m outlets; balance through distributors), is only marginally lower
than the largest player in the Indian Consumer sector, Hindustan Unilever, which
reaches ~7m outlets. Even if PGHH has to pay distribution commission to the
April 2016
7

P&G Hygiene and Health Care
unlisted P&G Home Products for access to these 6m+ outlets, it would be worth it
because of the phenomenal growth opportunity. With low-priced units in both
Feminine Hygiene and
Vicks,
PGHH is well placed on the SKU front. Currently, rural
markets account for ~20% of its Feminine Hygiene sales, which should increase, as
the product is now highly affordable and is an essential requirement for a large part
of the population.
P&G’s policy in India in terms of cost sharing across its companies is transparent:
Costs on distribution are shared across all entities since the sales force is
common. Costs are allocated according to sales.
All direct costs like materials are charged to the respective entity.
Some employee costs are shared, as resources are shared. All cost allocations
are based on sales.
As a group, the companies get better rates for marketing spends and for joint
material procurements. Some R&D costs are also shared
Unmatched category development efforts
Its category development efforts set PGHH apart from its peers in the Feminine
Hygiene segment. In the Consumer sector, only Colgate-Palmolive (India) in the oral
care segment surpasses PGHH’s efforts in growing the Feminine Hygiene category.
For the past few years, PGHH has been running a program called
Parivartan
in
schools across India, educating menstruating schoolgirls about the need for better
hygiene. The program also involves distribution of free sanitary pads.
Through its disproportionate focus on the ‘point of market-entry customer’, it has
reached 4m-5m schoolgirls each year in 15,000 schools across the country in the
each of the past three years including FY15 (June year-end). In a category where
overall penetration is around 16% and rural penetration is in single digits, the
benefits of such efforts are massive. Focus on ‘point of entry customer’ is very high,
not only in India but also globally, partly because P&G believes that loyalty to the
first Feminine Hygiene product that a female uses is fairly high.
Exhibit 6: ‘Parivartan’ – Increasing barriers to entry
Parivartan reach in schools (girls in mn)
5.0
4.0
2.1
2.4
2.5
4.0
4.0
FY09
FY10
FY11
FY12
FY13
FY14
FY15
Source: Company, MOSL
Apart from the obvious benefits from higher product affordability after price cuts,
improvement in education and income levels, rapid urbanization, rising proportion
April 2016
8

P&G Hygiene and Health Care
of working women and higher product awareness, the management rightly felt that
spreading product awareness would grow the Feminine Hygiene segment
significantly, especially considering the backdrop of paltry market penetration in
what is an essential product for a large segment of the population.
The ‘point of entry customer’ focus (extensive program in schools and villages for
developing the Feminine Hygiene category) would continue. In fact, it could pick up
further, despite increasing global focus on both revenue and profitability. PGHH
uses smaller size packs of its premium and mid-tier products as part of this program,
and not its lower priced products. We note that none of its peers has a category
development program.
Leader in Feminine Hygiene segment; far ahead of competition
PGHH’s market share in the Feminine Hygiene segment (all its feminine hygiene
products are under
Whisper
brand) has grown from 50% in FY09 to over 56% in
FY15. While competitors followed PGHH’s price cuts, they do not have the
combination of its strengths – distribution reach, dedicated focus, category
development efforts, backing and product portfolio from the largest Feminine
Hygiene company in the world (P&G), and financial muscle. We believe PGHH can
not only grow the category, but also continue to gain market share from weaker
peers. Thus, PGHH could have a much higher share of a rapidly growing pie.
Exhibit 7: PGHH has reported strong growth in Feminine Hygiene market share
P&GHH's market share in feminine hygiene market(%)
58
55
52
49
46
FY09
FY10
FY11
FY12
FY13
FY14
FY15
Source: Company, MOSL
Taking a look at some of PGHH’s competitors in Feminine Hygiene
Johnson and Johnson (J&J)
is currently the second-largest player in the Feminine
Hygiene market, with ~28% market share through its
Stayfree
and
Carefree
brands.
J&J has lost further market share since the price cuts. Feminine Hygiene products
account for only 16% of its total sales in India in FY14 (last available data, J&J India is
an unlisted company). Its main focus is on pharmaceutical products and baby
products. Over the long run, J&J’s market share losses in the Feminine Hygiene
segment have been even steeper. Before PGHH launched
Whisper
in 1989, J&J was
the dominant market leader in the Feminine Hygiene segment.
April 2016
9

P&G Hygiene and Health Care
Exhibit 8: PGHH consistently beating J&J in Feminine Hygiene business
INR m
P&G Sanitary products sales (June year-end)
Growth (%)
Johnson and Johnson sanitary sales (adjusted)
Growth (%)
J&J sanitary napkin sales as proportion of P&G (%)
FY09
4,279
3,150
73.6
FY10
5,324
24.4
3,787
20.2
71.1
FY11
6,235
17.1
3,907
3.2
62.7
FY12
FY13
FY14
8,122 10,883 13,462
30.3
34.0
23.7
4,860 5,476 6,723
24.4
12.7
22.8
59.8
50.3
49.9
Source: Company, MOSL
Over the last five years, J&J India’s Feminine Hygiene business has consistently
underperformed PGHH’s. As a percentage of PGHH’s Feminine Hygiene sales, J&J’s
Feminine Hygiene sales have declined from ~74% in FY09 to ~50% in FY14. Its
market share is believed to be ~28% as at the end of FY14, half of PG’s market share.
This also means that the entire portion of PGHH’s incremental market share gain in
the past few years has been at the cost of J&J. Nevertheless, the market remains a
duopoly, with the two larger players accounting for ~84% of the market. There is no
marked difference in the average product prices of PGHH and J&J India.
In a deal concluded in November 2013, J&J India’s parent sold
Stayfree
and
Carefree
tampon brands in the US, Canada and the Caribbean to Energizer Holdings in an all-
cash deal worth USD185m. Energizer had a small presence in the global Feminine
Hygiene segment, with 4% of its sales coming from its own brand,
Playtex.
Whether
the India business will also be sold subsequently, remains to be seen. J&J India’s
website continues to list
Stayfree
as one of its brands in the consumer space and the
product packaging continues to mention it as a J&J product. Energizer does not have
a distribution presence in India and if any such deal happens, it may have to depend
on J&J or find a new partner for distribution. It could also go with Eveready
Industries India (EVRIN), formerly Union Carbide (India), and a part of the BM
Khaitan Group. EVRIN is a licensee of the
Eveready
brand of batteries in India,
Bhutan and Nepal. Energizer owns the
Eveready
brand globally. While EVRIN has
access to over 3.2m outlets, it has no experience in selling healthcare products.
Kimberly Clarke Lever,
the erstwhile third-largest player, with 4.5% market share in
2008, has seen its market share declining to negligible levels. It is no longer focused
on the Feminine Hygiene segment (brand:
Kotex),
preferring instead to concentrate
on its baby diaper brand
Huggies,
which has lost substantial market share to P&G
Home Products’
Pampers.
Kimberly Clarke Lever is a joint venture (JV) in India
between Kimberly Clarke USA, a large player in the global consumer and Feminine
Hygiene market, and Hindustan Unilever (HUVR). Despite access to HUVR’s
distribution reach,
Kotex
never really made a big dent in the Feminine Hygiene
segment. The financials of the JV (part of HUVR’s annual report) indicate poor
growth and EBITDA losses.
April 2016
10

P&G Hygiene and Health Care
Exhibit 9: Financials of Kimberly Clarke Lever India
INR m
Net sales
Growth (%)
Operating expenses
EBITDA
EBITDA margin (%)
FY11
1,024
-
1,152
-128
-12.5
FY12
1,204
17.6
1,274
-70
-5.8
FY13
1,157
-4
1,327
-170
-14.7
Source: Company, MOSL
HUVR has stopped giving detailed financials of the Kimberly Clarke Lever JV in the
last two years in its annual report, but there has been severe market share erosion
even in the case of
Huggies
over the past two years. Net losses continued to be a
feature of this JV with INR98m loss even in FY15.
Smaller players
in the market include Japanese company, Unicharm, which
launched its
Sofy
brand of sanitary napkins in India in 2011. It is the only player to
gain market share (albeit off a zero base) apart from PGHH in the past few years.
Unicharm seems to have grabbed a part of the market vacated by Kimberly Clarke
Lever.
Sofy
is a successful brand in other parts of Asia, but its geographical presence
in India is limited. Unicharm also makes the
Mamy Poko
brand of diapers, launched
in India in 2009. It has two plants at Majrakath (Neemrana) in Rajasthan and Sri City
in Andhra Pradesh. The company’s average product prices are also at a discount
compared to the larger players, PGHH and J&J.
Unicharm’s
Mamy Poko
has been a huge success.
Sofy,
while successful, still has less
than 2% market share according to our analysis of Unicharm India’s published
segmental data. Through
Mamy Poko,
Unicharm introduced a disruptive product –
pant style diapers – in the baby diaper segment. However, it hasn’t been able to
bring in a breakthrough product in the Feminine Hygiene space and price discount
has not been a significant help. Despite leveraging on the reasonable distribution
reach created by piggybacking on the distribution reach of
Mamy Poko, Sofy
(or its
newer feminine hygiene brand,
Lifree)
haven’t made much headway. Nevertheless,
from a competitive standpoint, we believe Unicharm remains the player to watch
out for.
Exhibit 10: Unicharm’s Feminine Hygiene sales are only a fraction of PGHH’s
INR m
Unicharm, Total Net Sales as per P&L (including diapers)
Unicharm, Total Gross Sales as per P&L (including diapers)
Sofy
Lifree
Total Feminine Hygiene sales – Unicharm
PGHH Feminine Hygiene sales
Unicharm India/ P&G Feminine Hygiene (%)
If PGHH is 56% market share,
then Unicharm India’s market share is (%)
FY14
FY15
4,519 8,438
5,077 9,369
245
489
-
8
245
497
13,462 15,327
1.8
3.2
1.1
1.8
Source: Company, MOSL
Growth (%)
87
85
100
103
14
April 2016
11

P&G Hygiene and Health Care
The other significant global player, Swedish company SCA Hygiene (brand:
Libresse)
recently re-entered India on its own after an unsuccessful JV with Godrej Consumer
Products. SCA also sells its other global brands like
Tempo
and
Tork
through the
import route.
Tempo
is the world’s largest consumer tissue brand and
Tork
is a hand
sanitizer brand. Media reports indicate that its distribution reach is less than
100,000 outlets. SCA set up a manufacturing facility at Ranjangaon near Pune in
2015 for both its diaper brand
Libero
and tissue brand
Tempo
at a capex of INR5b
over five years. Gradually, it will also begin manufacturing
Libresse
and
Tork
locally.
With SCA Hygiene’s re-entry, all the large global players have their presence in India.
Besides the large MNC players, a smaller global player, Bella Hygiene has a token
presence in India. Bella (earlier a JV between TZMO of Poland and Premier of India;
now a wholly owned subsidiary of TZMO) is present in select markets like Pune.
Exhibit 11: Price points of sanitary pads in India
Category
Basic
PGHH - Whisper choice/regular
J&J - Carefree super dry, Stayfree secure/XL wings/dry
Unicharm - Sofy body fit/XL
Emami - She comfort select
Intermediate
PGHH - Whisper maxi clean/fit/regular
J&J - Stayfree dry max/all night/with wings
Unicharm - side walls large/XL
Advanced
PGHH - Whisper ultra clean/with wings/Xl
J&J - Stayfree advanced/ultra-thin
Emami- She comfort ultra with wings/Xl
Number of
pads
8
7-20
45
8-20
8-15
7-28
6-28
15-30
7-14
6-15
Price
(INR)
34
34-70
345
30-70
77-138
85-315
45-198
159-310
78-135
40-90
Price per
pad (INR)
4.25
3.5-4.8
7.67
3.5-3.75
9.2-9.625
11.3-12.1
7.1-7.5
10.3-10.6
9.6-11.2
6-6.7
Source: MOSL
Smaller players, store brands have no significant presence
Apart from the MNC brands stated above, there are small local brands in the
Feminine Hygiene market –
She Comfort
(Emami; earlier owned by Royal Hygiene),
Shapers
(Gufic Biosciences),
Don’t Worry
(Mankind Pharma) and
Wow
(Future
Retail). None of these has been able to make its presence felt. Feminine Hygiene is a
difficult market to penetrate, given the personal touch and trust factor involved.
Unlike most other consumer categories in India, there is no unorganized segment.
Users move from traditional products like cloth directly to the organized segment,
dominated by the MNCs. PGHH enjoys the highest market share and the most
favorable barriers to entry versus existing and potential competition.
Interestingly, Feminine Hygiene is also a category where private labels have not
been successful globally or in India. Even Wal-Mart does not have a competing
product. It is a category where brand equity and assurance of quality counts for a lot
and private labels have a reputation of being ‘cheap’.
April 2016
12

P&G Hygiene and Health Care
Increasing salience in P&G’s global scheme
In a restructuring exercise last year, feminine care (accounting for ~6% of P&G’s
global sales) is now clubbed together with baby care, feminine care and family care
instead of being part of the Healthcare segment. This is expected to result in greater
focus and innovation in this segment, where P&G is also the global market leader.
While the share of revenue from India on an overall basis (including unlisted P&G
Home Products and listed entities, PGHH and Gillette India) is only around 2.1%, the
Feminine Hygiene segment in India is more relevant and increasing in salience on a
global basis, more than doubling from 2.6% of global Feminine Hygiene sales in FY10
to 5.3% in FY15 (both June year-end).
Exhibit 12: PGHH - rising salience of Feminine Hygiene segment in global sales
USD INR rate
India sales In USD m
Global sales USD m
India sales to global sales
Global feminine care proportion
Global feminine care sales USD m
PGHH feminine care INR m
PGHH feminine care USD m
PGHH Feminine care to global
FY10
46.5
835
73,435
1.1%
6%
4,406
5,324
115
2.6%
FY11
44.7
1,095
76,982
1.4%
6%
4,619
6,235
140
3.0%
FY12
55.5
1,159
79,545
1.5%
6%
4,773
8,122
146
3.1%
FY13
60.2
1,319
80,116
1.6%
6%
4,807
10,883
181
3.8%
FY14
60.1
1,529
80,510
1.9%
6%
4,831
13,462
224
4.6%
FY15
63.5
1,629
76,279
2.1%
6%
4,577
15,327
241
5.3%
Source: Company, MOSL
Exhibit 13: Segment-wise revenue (INR m)
Healthcare Business
Detergent contract
Feminine Hygiene
Old Spice
Exhibit 14: Feminine Hygiene segment’s revenue growth
Revenue (INR m)
23 23
12
11
15
Growth (%)
26 24
17
30
34
24
14
21
8
6
Source: Company, MOSL
Source: Company, MOSL
The movement of the global feminine care segment last year from the Healthcare
head to a new head – Feminine, Family and Baby Care – enables synergies,
alignment with competitors on product profile and development of categories like
adult incontinence within this segment using a combination of feminine and baby
care segment technologies. These new products globally are also likely to be a part
of PGHH’s portfolio in India.
Willingness to go for selective price hikes in Feminine Hygiene segment
After the voluntary price cuts and passing on of excise duty and VAT reduction
benefits to consumers, PGHH restrained itself until FY14 from hiking product prices
even when raw material costs went up. As a result, margins were under pressure.
April 2016
13

P&G Hygiene and Health Care
Over the last three years, however, PGHH has hiked prices as and when required,
being fairly confident about its volume growth and strengths over competitors.
Gross margin has come off a trough in FY13. In the longer term, there is huge scope
for premiumization, as consumers trade up to thinner and ‘all night’ products. For
now, however, gross margin may have neared its medium-term peak at 62.4% in
2QFY16. Feminine Hygiene features strong brand loyalty in India and worldwide.
Consumers usually trade up and rarely trade down. However, given the extremely
low penetration, growth is unlikely to come from the premium end of the market.
Exhibit 15: After price cuts earlier, margins improving in the last few years
Gross margin (%)
EBITDA margin (%)
Source: Company, MOSL
Exports – a longer term opportunity
P&G’s Feminine Hygiene market share is ~50% in the US and Western Europe. In
Central and Eastern Europe, Middle East and Africa, it is ~46%, but is lower in Latin
America at 24% and Asia at 13% (despite high market share in India). This is due to
its fairly recent entry and lack of presence across all segments in these two
geographies. However, the last two geographies are expected to be growth drivers
for the global Feminine Hygiene segment. The company concurs that exports from
India could rise due to geographical proximity to other Asian markets. Exports from
India are very small as a percentage of PGHH’s sales. There is no significant
difference in the cost structure, but geographical proximity does help.
Exhibit 16: Exports currently a miniscule proportion of PGHH’s sales
Exports (INR m)
Exports to Sales (%)
1.2
1.0
1.0
0.6
1.0
0.5
0.2
12
FY08
80
FY09
97
FY10
48
FY11
76
FY12
174
FY13
238
FY14
0.4
87
FY15
Source: Company, MOSL
April 2016
14

P&G Hygiene and Health Care
Healthcare and Old Spice – steady growth
In FY16, we expect the Feminine Hygiene segment to contribute 65% of sales and
the Healthcare segment (Vicks) to contribute ~31% of sales. The remaining ~4%
contribution would come from
Old Spice
(aftershave lotion / deodorants).
Healthcare segment
All products in this segment are sold under the
Vicks
brand and include
Vicks
Vaporub
balms,
Vicks Cough Drops, Vicks Inhaler
and
Vicks Action 500
tablets. PGHH
is the market leader in the cough, cold and hay fever segment of OTC products, with
over 30% market share.
In FY15, PGHH’s market share in the Healthcare segment in India was its highest
ever. Growth has picked up compared to preceding years in the last year. Renewed
advertising efforts in case of
Vicks
in early FY15 with Virat Kohli as the brand
ambassador seems to have paid off. The management attributes the recent strong
growth to ‘product initiatives and investment behind proven equity advertising’. Its
key brand extension in this segment –
Vicks Vaporub
– had a record year in FY15 and
attained its highest ever market share.
Vicks
continues to be India’s leading
Healthcare brand according to the management. FY15 also saw the launch of
Vicks
MultiPain Relief Gel.
Categories like pain gel are large globally, contributing ~25% of
Vicks’
sales.
Vicks
is a
large brand for the parent and reached sales of USD1b two years ago. Sleep aids is
another category that was launched three years ago by the parent; these are sold
only in USA and Canada currently, and account for ~10% of
Vicks
sales.
New products under P&G’s global OTC JV with Teva like vitamins and mineral
supplements could potentially form part of the Healthcare segment in PGHH. These
are from the acquisition of New Chapter Vitamins by P&G in North America a few
years ago.
Exhibit 17: Healthcare segment growth
Healthcare Business
14.7
6.3
16.8
15.4
5.3
16.2
Growth (%)
18.117.3
16.8
11%
Ointments and
Creams
53%
Cough Drops
Tablets
Exhibit 18: Healthcare product-wise breakdown - FY15
10.3
3.2
10.9
36%
-1.3 -2.2
-2.2
Source: Company, MOSL
Source: Company, MOSL
Vicks Vaporub
accounts for over 53% of segment’s revenue and
Vicks Cough Drops
contributes around 36%, while the other two products (mainly tablets, and to a
April 2016
15

P&G Hygiene and Health Care
lesser extent, inhalers) account for the rest. Of the overall revenues, Vicks Vaporub
and Vicks cough drops are ~17% and 11% of revenues respectively.
In Healthcare, part of the sales growth in FY15 may have been weather-related,
mainly because of the severity of the winter and unseasonal rains. A high base in
one year can result in lower growth in the subsequent year, as is proving to be the
case in 1HFY16.
Competitors in this segment vary across products like
Vicks Vaporub, Vicks Inhaler,
Vicks Cough Drops
and
Vicks Action 500,
and include Reckitt Benckiser (which owns
the erstwhile Paras Pharma business), Amrutanjan, Dabur, Emami, Mondelez-
Cadbury, Ricola and all the leading domestic and OTC pharma companies that have
the products to cater to this segment.
Old Spice range of products
Until March 2013, PGHH had out-licensed the manufacture of
Old Spice
range of
aftershave products to a third party. Hence, this business did not reflect in its sales,
but as part of licensing income. After termination of the agreement with the third
party, sales of
Old Spice
products returned to PG’s books from March 2013. During
the out-licensing phase,
Old Spice
was focused on aftershave products. PGHH has
recently entered the fast-growing deodorants category to leverage its brand equity
and distribution reach.
For the parent,
Old Spice
is present across categories like body wash, deodorants
and body spray, apart from aftershave lotions. Besides
Gillette, Old Spice
is P&G’s
key men’s grooming brand globally, and should be an important growth area in India
as well. Yet, given its small contribution to overall revenue and continued healthy
growth in the two larger segments, we expect the share of
Old Spice
in overall sales
to remain low.
Exhibit 19: Old Spice sales trend
Old Spice Sales (INR m)
133.4
1,150
814
349
2.0
FY13
FY14
FY15
FY16E
FY17E
FY18E
Source: Company, MOSL
830
38.6
21.7
20.0
Growth (%)
1,680
1,400
Exhibit 20: Old Spice aftershave and deodorants
Source: Company, MOSL
April 2016
16

P&G Hygiene and Health Care
SWOT Analysis
With trust an important
factor, the reputation that
Whisper
and
Vicks
enjoy is an
entry barrier.
PGHH has the widest
portfolio among peers; the
support of its parent aids
further portfolio expansion.
PGHH is reaching 4m-5m
school girls every year
through its extensive category
development program.
Feminine Hygiene accounts
for 2/3
rd
of PG’s sales, much
higher thah peers like J&J,
Unicharm, Kimberly Clarke
and Emami.
While the different P&G
entities in India are in
mutually exclusive segments,
it also means that new
product categories will go to
the unlisted entity (P&G Home
Products).
If PGHH is unable to execute
on the growth opportunity in
Feminine Hygiene, its high
dependence (65% of sales) on
this segment will be a drag.
Penetration of only 16% in the
key Feminine Hygiene
category is a massive
opportunity,
PGHH reaches 1.3m-2m
outlets across its segments.
P&G Home products reaches
over 6m outlets,.
PGHH could get products in
the Cough, Cold and Hay Fever
segment from the global P&G-
Teva OTC JV.
PGHH could be P&G’s exports
hub for the Feminine Hygiene
segment across Asia, given
low existing market share in
the region.
PGHH’s products bank heavily
on the trust factor. Any
product quality incident could
have severe ramifications.
PGHH is not present/strong at
the lowest commoditized end
of the Feminine Hygiene
market. Starkly higher growth
in this sub-segment compared
to other sub-segments could
have a detrimental impact on
market share.
April 2016
17

P&G Hygiene and Health Care
Operating leverage to improve profitability
Other expenses to decline as a proportion of sales
Highly profitable category; Gross margins better then peers
Impact of price cuts on margins and subsequent recovery
High gross margins indicate high profitability:
In the period FY09-FY11, the
company had cut product prices in the feminine hygiene segment by 25-45% in an
effort which successfully boosted volume growth.
Despite the price cuts, PGHH’s gross margin is among the highest in the Consumer
space, indicating high pricing power.
Exhibit 21: Gross margin for FY15 was 60.5%
Gross margin (%)
Source: Company, MOSL
Exhibit 22: Gross margin comparison with peers
Colgate-Palmolive
80.0
70.0
60.0
50.0
40.0
30.0
ITC
GSK Consumer
Neste India
HUL
PGHHL
Source: Company, MOSL
Impact of price cuts on margins, recovery and potential further
rise in margins in the long term
Phase of decline in margins (FY10-FY13)
In response to the price cuts, volumes soared, but revenue growth was impacted, as
realizations declined steeply. Sales grew 19.4% in FY10 and 8.5% in FY11, despite
volume growth of 28% and 31%, respectively in the Feminine Hygiene segment.
Following the price cuts, overall gross margin declined and staff and other costs
increased. Between FY10 and FY13, as a percentage of sales, raw material cost
April 2016
18

P&G Hygiene and Health Care
increased 1,150bp and staff cost rose 120bp. The big collapse in EBITDA margin was
in FY11, when it slipped from 27% to 16.3%, while absolute EBITDA declined 34.4%.
Since then, the dip in EBITDA margin was more gradual, down to 14.9% in FY13.
Interestingly, while advertisement spending grew sharply for most of the years, on
an absolute basis, it was outpaced by sales growth in this period. Hence, the
advertisement spending to sales ratio declined.
Exhibit 23: Impact of price cuts on EBITDA margin over FY10-13
11.5
27.0
1.2
1.8
0.6
1.7
14.9
Source: Company, MOSL
Phase of recovery in margins (FY13-FY15)
After a trough in FY13, EBITDA margin expanded 490bp over the next two years to
20.8%. This was led by healthy volume growth and selective price increases, unlike
the earlier period when prices were cut and then maintained. Margin expansion was
also aided by soft material costs, operating leverage on healthy sales growth, and
lower than average A&P to sales over this period. Admin expenses to sales,
however, increased during this period.
Exhibit 24: Volume growth + Cost savings = Margin improvement over FY13-15
2.3
14.9
1.1
0.8
2.7
0.9
20.8
Source: Company, MOSL
The next phase (FY15-FY18E), operating leverage kicks in
Gross margin has improved considerably in 1HFY16, following moderation in costs of
packaging, cellulose, cotton, wax and chemicals. Gross margin expanded 250bp YoY
to 62.4% in 2QFY16 and 300bp YoY to 62.1% in 1HFY16. We estimate gross margin
at 62.6% for the full year and a steady increase up to 62.9% by FY18 from 60.5% in
FY15. Over the long term, with premiumization of the Feminine Hygiene segment,
April 2016
19

P&G Hygiene and Health Care
gross margin could move up sharply. However, for the next few years, the mid-tier
segment would drive growth. Hence, we do not expect a big spurt in the near term.
As a percentage of sales, staff costs have risen in YTDFY16. However, with revival in
sales growth momentum in subsequent years, we expect the staff cost to sales ratio
to decline by 30bp over FY15-18 to 4.6%.
A&P to sales has declined in the current year as is the case for FMCG peers. For
1HFY16, A&P to sales was 12.7%. We expect higher A&P in 2HFY16, leading to full
year A&P to sales of 16%. The ratio should improve further to 17.6% in FY17 and to
17.7% in FY18, in line with the average for earlier years. Even A&P to sales of ~15%
is one of the highest among Consumer peers.
We expect 350bp decline in other expenses to sales over FY15-18 to 15.6%.
Exhibit 25: Benign material costs and Operating cost to drive further profitability
2.4
20.8
0.3
0.0
3.4
3.5
23.4
Source: Company, MOSL
Exhibit 26: Key other expenses components
Description (INR m)
Freight, transport, warehousing and distribution charges
% of Sales
Royalty
% of Sales
Business process outsourcing expenses
% of Sales
Professional and legal services
% of Sales
Distributor Coverage Expenses
% of Sales
Other expenses
% of Sales
Total-Other expenses
% of Sales
FY11
413
4.1
517
5.2
133
1.3
157
1.6
195
1.9
331
3.3
1,747
17.4
FY12
667
5.1
634
4.9
134
1.0
192
1.5
187
1.4
443
3.4
2,257
17.4
FY13
738
4.4
798
4.7
157
0.9
235
1.4
249
1.5
569
3.4
2,747
16.3
FY14
810
4.0
955
4.7
328
1.6
245
1.2
532
2.6
481
2.3
3,351
16.3
FY15
1,070
4.6
1,114
4.8
274
1.2
269
1.2
739
3.2
551
2.4
4,017
17.2
Source: Company, MOSL
April 2016
20

P&G Hygiene and Health Care
Exhibit 27: YoY EBITDA margin expansion leading to stupendous EBITDA growth recently
EBITDA (INR b)
67.9
25.1
24.6
EBITDA growth (%)
19.7
22.2
15.1
13.8
21.0
1.6
2.5
FY10
-34.4
FY11
2.0
FY12
2.5
FY13
4.2
FY14
4.8
FY15
6.0
FY16E
6.9
FY17E
8.3
FY18E
Source: Company, MOSL
Exhibit 28: Tax rate increase was a drag on PAT growth over FY11-13
90.0
60.0
30.0
0.0
-30.0
-60.0
EBITDA growth (%)
Tax rate (%)
PAT growth (%)
Source: Company, MOSL
The tax rate has largely peaked. While EBITDA grew by over 20% in FY12 and FY13,
EPS growth was not as impressive because of a steep increase in effective tax rate
from 14.6% in FY11 to 29% in FY13. This was mainly because of expiry of the 100%
tax benefit at the Baddi unit, Himachal Pradesh, in FY11. Tax rate is likely to be 32%
in FY16E, close to peak levels.
EBITDA grew by 34% CAGR over FY12-FY15. Going forward, while such growth is
unlikely to sustain, we believe EPS growth of ~20% is possible over the medium to
long term.
April 2016
21

P&G Hygiene and Health Care
Cash Flows improving
Impressive Fixed asset turnover; Negative working capital
Fixed asset turnover is extremely good at ~4x and working capital cycle has been
consistently negative. RoIC is also over 100%, if one strips out the cash and cash
equivalents, the largest component in the balance sheet.
Exhibit 29: Negative net working capital days and healthy return ratios
Particulars
Inventory (Days)
Debtor (Days)
Creditor (Days)
Net Working Capital (Days)
Fixed Asset t/o
RoE (%)
RoCE (%)
RoIC (%)
FY08
22
8
54
-24
3.2
41.3
41.3
86.5
FY09
24
8
52
-19
3.5
45.5
45.5
87.7
FY10
21
10
57
-26
3.8
41.0
41.0
130.5
FY11
22
11
62
-29
3.2
26.6
26.6
101.9
FY12
22
11
58
-24
3.8
27.9
27.9
104.9
FY13
23
14
50
-13
4.5
27.1
27.1
99.4
FY14
21
15
39
-3
4.8
33.4
33.8
118.7
FY15
19
16
47
-13
4.5
31.0
31.4
155.9
FY16E FY17E FY18E
17
17
17
17
16
16
49
49
50
-15
-16
-17
4.0
3.9
4.0
31.4
29.9
30.8
31.8
30.2
31.1
302.4
456.9 1035.5
Source: Company, MOSL
Lower Inter-group lending leading to improved Free Cash Flow
Net operating cash flow was healthy at INR4,256m in FY15 against INR3,352m in
FY14. Free cash flow was INR3,472m versus INR1,881m in the previous year.
Growth in other assets was under control at 8% to INR7.44b. Other assets have
declined from 46% of total assets in FY14 to 38%, but still remain fairly high. Lending
to fellow subsidiaries was 62% of other assets in FY15 compared to 70% in FY14. In
absolute terms too, this component declined from INR4,832m in FY14 to INR4,638m
in FY15.
Due to healthy OCF and FCF (partly aided by decline in group lending), cash balance
increased sharply from INR2,691m at the end of FY14 to INR6,186m at the end of
FY15.
Exhibit 30: Break-up of cash and cash equivalents
INR m
Cash as reported
Loans to fellow subsidiaries
Cash & Cash equivalents
FY10
2,323
2,007
4,330
FY11
1,300
3,327
4,627
FY12
1,824
3,808
5,632
FY13
1,660
4,300
5,960
FY14
2,691
4,832
7,523
FY15
6,186
4,638
10,824
Source: Company, MOSL
Exhibit 31: FCF to PAT, improving, in excess of 100% and superior to MNC peers (%)
FY11
135
76
39
69
71 82
108
71
86
FY12
FY13
FY14
FY15
93
28
109
60
126
101
132123
72
67
79 67
120
119
-12
PGHH
SKB
-41
Nestle
Colgate
HUL
Source: Company, MOSL
April 2016
22

P&G Hygiene and Health Care
Quarterly performance
Exhibit 32: Quarterly performance highlights
INR m
2QFY16 2QFY15 YoY (%) 1QFY16 QoQ (%) 1HFY16 1HFY15 YoY (%)
Total Net Sales
7,132
6,440
10.7
5,981
19.2
13,114 12,203
7.5
Other Operating Income
5
5
-2.1
4
9.3
9
7
36.4
Total Sales
7,137
6,445
10.7
5,986
19.2
13,123 12,210
7.5
Change in RM
268
88
205.9
-209
-228.7
60
-107
-155.9
Raw and Packing Material 1,398
1,617
-13.6
1,539
-9.1
2,937
3,335
-11.9
Purchase of traded goods 1,017
882
15.3
961
5.9
1,978
1,764
12.2
Employees expenses
284
227
25.1
336
-15.4
621
559
11.0
Advertising expenses
784
879
-10.7
877
-10.6
1,661
1,927
-13.8
Royalty expenses
355
316
12.4
297
19.4
652
591
10.3
Other expenses
870
1,154
-24.6
1,217
-28.5
2,087
2,069
0.8
Total Expenses
4,977
5,163
-3.6
5,018
-0.8
9,994 10,138
-1.4
EBITDA
Interest
Depreciation
Other Income
PBT
Tax
PAT
PAT after Exceptionals
(%)
Gross Margin
EBITDA Margin
Tax Rate
Net margin
% of Sales
Raw Materials
Employees expenses
Advertising expenses
Royalty expenses
Other expenses
37.6
4.0
11.0
5.0
12.2
40.1
3.5
13.6
4.9
17.9
62.4
30.3
33.4
20.6
59.9
19.9
29.7
14.1
2,161
23
142
206
2,202
735
1,467
1,467
1,283
5
159
171
1,290
384
907
907
68.4
400.0
-10.6
20.6
70.6
91.5
61.8
61.8
Change
(bp)
2.5
10.4
3.6
6.5
Change
(bp)
-2.5
0.5
-2.6
0.1
-5.7
968
12
127
212
1,041
344
698
698
123.2
100.0
11.6
-2.9
111.4
113.8
110.2
110.2
Change
(bp)
0.7
14.1
0.4
8.9
Change
(bp)
-0.7
-1.6
-3.7
0.0
-8.1
3,128
35
269
418
3,243
1,078
2,165
2,165
2,073
16
270
381
2,167
646
1,522
1,522
50.9
113.0
-0.4
9.7
49.6
67.0
42.3
42.3
Change
(bp)
3.0
6.9
3.5
4.0
Change
(bp)
-3.0
0.2
-3.1
0.1
61.7
16.2
33.0
11.7
62.1
23.8
33.2
16.5
59.1
17.0
29.8
12.5
38.3
5.6
14.7
5.0
20.3
37.9
4.7
12.7
5.0
40.9
4.6
15.8
4.8
15.9
16.9
-1.0
Source: Company, MOSL
Net sales higher than expected:
Net sales in 2QFY16 (June year-end) rose 10.7% YoY
to INR7,137m. Sales were 2.5% higher than our estimate of INR6,961m. Feminine
Hygiene as well as Healthcare reportedly grew in double digits. Thus, after a blip in
1QFY16, when Healthcare reportedly declined, double-digit growth is back.
Strong performance on margin front:
Gross margin expanded 250bp YoY and 70bp
QoQ. We had anticipated an improvement of 314bp YoY. 2QFY16 gross margin was
the highest reported for a comparable quarter since the price cuts a few years ago.
Employee cost grew 25% YoY to INR284m (4% of sales for the quarter). This was
11.7% above our estimate. On the other hand, A&P as well as other expenses
(including royalty) declined on an absolute basis YoY by 10.7% and 16.7%,
respectively, and by 264bp and 565bp YoY, respectively, as a percentage of sales.
April 2016
23

P&G Hygiene and Health Care
PGHH has not shared details on one-offs. We believe some component of the
absolute decline in both these expenses may be because of one-offs. EBITDA margin
expanded over 1,037bp YoY to 30.3%, a 24-quarter high. Absolute EBITDA grew
68.4% YoY to INR2,161m, 43% above our estimate. PAT also grew sharply by 61.8%
YoY to INR1,467m, 37.5% above our expectation.
Balance sheet improves further:
As a result of 10% YoY decline in absolute
inventory and 21% YoY increase in creditors, negative net working capital increased
34% YoY. There was an improvement in negative working capital over June 2015
level as well. Another encouraging aspect about the results was the 33% YoY decline
in other assets and 41% decline from June 2015 levels. The improvement came from
sharp declines, both in long-term and short-term advances, which indicates that
inter-group lending has declined significantly. Cash balance grew from INR4.25b at
the end of December 2014 and INR6.2b at the end of June 2015 to INR10b at the
end of December 2015.
April 2016
24

P&G Hygiene and Health Care
Initiating coverage with Buy
Certainty on volume growth commands premium valuation
Valuation in-line with MNC peers
Upside risk from open offer
Valuation in-line with MNC peers; Expect 20% EPS CAGR
On an average, the stock has traded at 41x one-year forward earnings for the last
three years, 38x one-year forward earnings for the last five years, and 35x one-year
forward earnings for the last 8 years.
Exhibit 33:
Valuation
Matrix of coverage universe
Company
Consumer
Asian Paints
Britannia
Colgate
Dabur*
Emami*
Godrej Consumer
GSK Consumer
Hind. Unilever
ITC
Jyothy Labs
Marico*
Nestle
Page Industries
PGHH
Pidilite Inds.
Radico Khaitan
United Spirits
Reco
Neutral
Buy
Neutral
Neutral
Buy
Neutral
Buy
Neutral
Buy
Buy
Neutral
Neutral
Buy
Buy
Buy
Buy
Buy
Price
(INR)
863
2,816
843
267
1,015
1,365
6,010
884
321
300
254
5,889
12,755
6,402
603
92
2,439
P/E (x)
EV/EBITDA (x)
ROE (%) Div. (%)
Mkt Cap EPS Growth YoY (%)
(USD M) FY16E FY17E FY18E FY16E FY17E FY18E FY16E FY17E FY18E FY16E FY16E
12,420
5,069
3,440
7,044
3,456
6,975
3,793
28,688
38,718
816
4,921
8,522
2,135
3,174
4,640
182
5,319
27.4
49.9
6.4
15.0
14.0
24.5
20.0
5.0
2.7
26.4
24.8
-7.3
21.0
21.0
48.5
-3.0
LP
13.0
17.5
11.6
16.2
23.6
20.0
13.0
10.9
13.1
-8.7
15.8
-10.7
25.0
10.6
10.2
31.5
76.9
9.3
13.9
13.6
12.5
16.9
14.4
10.7
14.2
14.0
12.6
12.4
18.4
31.3
19.9
15.1
28.9
46.6
45.6
39.2
38.5
38.2
41.6
41.1
36.1
48.1
26.1
33.8
45.8
49.1
60.0
49.7
40.5
14.2
84.9
40.4
33.4
34.5
32.9
33.6
34.3
31.9
43.4
23.0
37.0
39.6
55.0
48.0
44.9
36.8
10.8
48.0
37.0
29.3
30.4
29.2
28.8
30.0
28.9
38.0
20.2
32.9
35.2
46.5
36.5
37.4
32.0
8.4
32.7
31.2
27.3
23.6
30.6
34.2
30.8
25.6
33.2
17.0
27.9
30.8
34.5
37.5
32.8
25.4
9.6
39.7
27.1
22.6
21.5
26.1
27.7
26.1
22.4
30.4
15.2
23.5
26.3
31.2
30.4
28.4
22.3
7.9
28.6
24.6
19.3
19.2
23.2
23.5
23.5
19.6
26.8
13.5
20.8
23.2
26.0
23.5
23.2
19.3
6.5
21.4
35.3
57.8
72.1
33.0
40.3
23.2
30.5
110.3
30.4
19.6
35.2
40.9
46.9
31.4
29.8
9.5
48.1
1.2
0.9
1.8
0.9
1.1
0.7
1.1
1.9
2.5
1.3
0.8
0.8
0.7
1.0
0.7
1.1
0.0
Note: For Nestle FY15 means CY14
Source: Company, MOSL
Current P/E multiples are in line with Consumer MNC peers (Adjusted for its high
non-operating income GSK Consumer’s PE is higher than what is stated above)
despite PGHH’s distinct advantages of (1) being in a much faster growing category,
and (2) enjoying far superior barriers to entry in its key Feminine Hygiene segment.
Its ongoing distribution expansion and unmatched category development efforts will
only enhance the entry barriers. PGHH could compound its revenues manifold by
gaining share in an ever increasing pie.
PGHH’s earnings growth prospects in the near term, medium term and long term
are superior to peers. We expect ~20% EPS CAGR over the medium to long term.
Balance sheet is healthy, with negative working capital and RoE/RoCE of over 30%
and RoIC of over 100%. These metrics call for a significant premium to peer
valuations. We assign a target multiple of 45x FY18E EPS to the company, a 10%
premium to the average one-year forward multiple of the last three years. Our
target price of INR7,690 implies 20% upside.
April 2016
25

P&G Hygiene and Health Care
Exhibit 34: One-year forward P/E
66
50
34
30.5
18
2
P/E (x)
3 Yrs Avg(x)
41.0
38.2
5 Yrs Avg(x)
10 Yrs Avg(x)
46.4
Source: Company, MOSL
Possible open offer to PGHH shareholders by parent company an upside risk
P&G owns 70.64% stake in PGHH and might make an open offer to PGHH’s
shareholders. India is a key growth area for the parent and salience of the Feminine
Hygiene segment in global sales is also increasing rapidly. While the potential open
offer is not one of our core investment arguments, it is a possibility. The open offer
price will have to be at substantial premium to the prevailing market price. In the
two recent open offers in the Consumer space, GlaxoSmithKline Consumer
Healthcare and HUVR paid 28% and 20% premium, respectively, to their then
prevailing market prices.
April 2016
26

P&G Hygiene and Health Care
BULL & BEAR Case
Bull Case
Our bull case assumptions have positive impact on operating margins and lower
capex assumptions for FY17E and FY18E.
Instead of assuming a decline in gross margins over FY16E in the base case, we
are assuming 20 bps YoY improvement each for FY17E and FY18E.
In the base case we are expecting over 150 bps increase in A&P in FY17E and
FY18E over FY16E levels. In the bull case we are assuming flat A&P to sales at
16% of sales, similar to FY16E, still higher than FY15 levels.
Instead of assuming Capex of ~INR1.6 b each for FY17E and FY18E, we are only
assuming capex of ~INR750m each for both years largely in line with the capex
of the preceding few years
There is no change to our FY16E EPS on the bull or bear case but there is an
increase of 9.8% in FY17E EPS and 11.8% in FY18E EPS over the base case EPS to
INR155.9 and INR191.1 respectively
Assuming the same 45x target multiple that we have taken for the base case, we
get a bull case target price of INR8,595 (upside of 34% to CMP) based on FY18
EPS instead of the base case target price of INR7,690, upside of 20%
Exhibit 35: Bull case
Sales (INR m)
Sales growth (%)
EBITDA (INR m)
EBITDA Margin (%)
EBITDA Growth (%)
PAT (INR m)
PAT Margin (%)
PAT Growth (%)
EPS (INR)
Target multiple (x)
Target Price (INR)
Upside/downside (%)
FY15
23,338
4,844
20.76
3,461
14.83
106.5
FY16E
25,648
9.9
6,053
23.6
25.0
4,201
16.38
21.4
129.3
FY17E
29,847
16.4
7,402
24.8
22.3
5,065
16.97
20.6
155.8
FY18E
35,921
20.4
9,088
25.3
22.8
6,207
17.28
22.5
191.0
45
8,595
34.2
Bear Case
Our bear case assumptions mainly have a negative impact on both sales growth
operating margins for FY17E and FY18E.
We are assuming a marginal decline in gross margins in FY17E and FY18E in the
base case. In the bear case assume an 80 bps decline between FY16E-FY18E
In our bear case, other expenses to sales are also expected to increase over
FY16E levels as sales growth going forward will be moderate
There is no change in FY16 EPS on the bull or bear case but there is a decrease
of of 11.3% in FY17E EPS and 19.8% decrease in FY18E EPS over the base case to
INR125.9 and INR137.1 respectively.
Assuming the same 45x target multiple that we have taken for the base case, we
get a bear case target price of INR6,167 (downside of 3.7% to CMP) based on
FY18 EPS instead of the base case target price of INR7,690, upside of 20%.
April 2016
27

P&G Hygiene and Health Care
Exhibit 36: Bear Case
Sales (INR m)
Sales growth (%)
EBITDA (INR m)
EBITDA Margin (%)
EBITDA Growth (%)
PAT (INR m)
PAT Margin (%)
PAT Growth (%)
EPS (INR)
Target multiple (x)
Target Price (INR)
Upside/(downside) (%)
FY15
23,338
4,844
20.76
3,461
14.83
106.5
FY16E
25,574
9.6
6,035
23.6
24.6
4,189
16.38
21.0
128.9
FY17E
28,333
10.8
6,063
21.4
0.5
4,094
14.45
-2.3
126.0
FY18E
32,040
13.1
6,664
20.8
9.9
4,454
13.90
8.8
137.0
45
6,167
-3.7
April 2016
28

P&G Hygiene and Health Care
Risks and concerns
Change in strategy
If PGHH decides to raise prices sharply in the Feminine Hygiene segment, it would
adversely impact affordability and volume growth potential. Having chosen to cut
prices and absorb the pain on the EPS growth front to achieve volume growth, we
believe the company is unlikely strive for profitability at the cost of volume growth.
Lending to subsidiaries
This is admittedly a poor corporate governance practice, but PGHH has been sharing
interest earned on these loans separately. These earnings are better than the
prevalent term-deposit rates. If the disclosure regarding interest income on lending
to subsidiaries is stopped, or it earns below term-deposit rates, there could be a
stock de-rating. Encouragingly, intra-group lending as a percentage of total cash and
cash equivalents is declining, albeit off a large base. It was, in fact, down sharply
even in absolute terms in FY15 as well as 1HFY16.
Exhibit 37: Interest earned versus term deposit rates
Interest rate on loan to fellow subsidiaries (%)
10.9
9.7
SBI 1 year term deposit rate (%)
10.2
9.2
9.0
9.5
8.8
8.9
8.8
7.6
FY11
FY12
FY13
FY14
FY15
Source: Company, MOSL
Even considering that SBI’s 1 year deposit rate is usually at a 50 bps discount to
peers, the gap between the prevalent deposit rate and the yield that the company
gets is comfortably large.
According the revised company guidelines of P&GHH, all related party transactions
are placed before the Audit Committee for review and approval. Prior omnibus
approval is obtained for related party transactions that are repetitive in nature and
entered in the ordinary course of business and at arm’s length. All related party
transactions are subjected to independent review by external chartered
accountancy firm to confirm compliance with the requirements under Companies
Act 2013 and the Listing Agreement.
Launch of Pampers diapers through unlisted entity
It was widely anticipated that
Pampers
diapers would be launched in India through
PGHH, as the business is an obvious fit with the company’s Feminine Hygiene
segment in terms of manufacturing and distribution. However, the parent chose to
launch
Pampers
diapers in India through its unlisted entity, P&G Home Products.
April 2016
29

P&G Hygiene and Health Care
Our optimism on PGHH’s prospects is because of the huge growth potential in the
Feminine Hygiene segment and not due to the possibility of P&G launching new
products in India through PGHH.
Possible increase in royalty
Royalty has reduced from over 5% of sales over FY07-11 to 4.8% in FY15. Any sharp
increase in the royalty rate could affect future profitability.
Exhibit 38: Royalty as a percentage of sales declined in recent years
Royalty (INR m)
6.3
5.4
5.3
% of Sales
5.2
4.9
4.3
2.6
5.0
4.7
4.7
4.8
178
FY05
245
FY06
270
FY07
342
FY08
418
FY09
583
FY10
517
FY11
634
FY12
798
FY13
955
FY14
1,114
FY15
Source: Company, MOSL
Steep rupee depreciation
PGHH’s forex expenses to sales (including imports) stood at 12.4% in FY15. Forex
income, on the other hand, is just 0.4% of sales, leading to net forex expenses at
12% of sales for the year. While the net forex expenses-to-sales ratio is declining
over the past few years, steep rupee depreciation could have an impact on
operating margin, going forward. Raw material imports (likely to be cellulose)
account for the largest share in total forex expenses.
Exhibit 39: Forex expenses to sales
16.8
14.9
13.2
11.4
Net forex expense/ (income) to sales (%)
16.5
14.4
13.2
12.0
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY15
Source: Company, MOSL
Declining dividend payout
In FY15, the general improvements all round in the balance sheet were negated by
lower dividend payout, which led to a build-up of cash balance and marginally lower
RoE and RoCE. While RoE and RoCE were still healthy at 31% in FY15, these were
lower than the 33% and 34% in FY14. RoIC, however, improved from already
impressive levels of 136% in FY14 to 182% in FY15. With huge growth in cash in
April 2016
30

P&G Hygiene and Health Care
1HFY16 and sharp decrease in group lending, we expect payout to increase to over
40% levels.
Exhibit 40: Dividend payout declined in past two years
Particulars
Inventory (Days)
Debtor (Days)
Creditor (Days)
Fixed Asset t/o
RoE (%)
RoCE (%)
RoIC (%)
Payout (%)
FY08
22
8
54
1.8
41.3
41.3
86.5
57.6
FY09
24
8
52
1.7
45.5
45.5
87.7
47.8
FY10
21
10
57
1.7
41.0
41.0
130.5
42.7
FY11
22
11
62
1.7
26.6
26.6
101.9
56.1
FY12
22
11
58
1.9
27.9
27.9
104.9
46.8
FY13
23
14
50
2.1
27.1
27.1
99.4
46.7
FY14
21
15
39
2.1
33.4
33.8
118.7
34.6
FY15
19
16
47
1.9
31.0
31.4
155.9
34.1
Source: Company, MOSL
April 2016
31

P&G Hygiene and Health Care
Company background
Procter & Gamble Hygiene & Health Care Limited (PGHH), a 71% subsidiary of P&G,
manufactures, distributes and markets three major brands in India –
Whisper
(sanitary napkins),
Vicks
(balm, cough drops and tablets), and
Old Spice
(aftershave
lotion and deodorants).
Whisper
is the market leader, with ~56% share in the
INR30.2b (FY16E) Indian Feminine Hygiene market, and is likely to contribute ~65%
of sales in FY16 (June year-end).
Vicks
is also the market leader, with over 30% share
in the INR25.5b (FY16E) Cough, Cold and Hay Fever segment of OTC (over the
counter) products, and is expected to contribute ~31% of PGHH’s FY16 sales. The
Old Spice
range, which had been out-licensed until March 2013, is now a part of PG’s
sales, but its share is expected to be small at ~4% of the company’s sales in FY16.
Exhibit 41: Revenue breakdown as of FY10
Exhibit 42: Revenue breakdown as of FY16E
Old Spice,
4%
Healthcare
Business,
31%
Revenue breakdown
FY16E
Feminine
Hygiene,
57%
Healthcare
Business,
43%
Revenue breakdown
FY10
Feminine
Hygiene,
65%
Source: Company, MOSL
Source: Company, MOSL
History in India
Vicks Product India was set up in 1951 as a subsidiary of Vicks Inc, USA. In 1964, a
public limited company called Richardson Hindustan was formed, which obtained an
industrial license to manufacture menthol and de-mentholized peppermint oil and
the
Vicks
range of products such as
Vicks Vaporub, Vicks Cough Drops
and
Vicks
Inhaler.
When P&G acquired
Vicks
globally in 1985, this entity became its subsidiary.
In 1989, the name of the company was changed to P&G India and the company
launched
Whisper
sanitary napkins. In 1999, the company’s name was changed
again to P&G Hygiene and Health Care. The company manufactures its range of
products at its plants in Goa and Himachal Pradesh.
The listed P&G Hygiene and Health Care is one of three P&G entities in India, the
others being P&G Home Products (unlisted) and Gillette India (listed; 75% owned by
the parent).
Management Background
From August 28, 2015, Mr Al Rajwani is the new managing director (MD) of the
company. Mr Rajwani is a P&G veteran of nearly 35 years, who has worked in
various roles globally – product supply, marketing and general management in USA,
Canada, China, Korea and the Arabian Peninsula. His last job prior to joining the
India operations was as General Manager/Vice President of P&G’s Arabian Peninsula
32
April 2016

P&G Hygiene and Health Care
and Pakistan operations. He was responsible for developing P&G’s extensive
portfolio of brands in Saudi Arabia, the Gulf, Yemen and Pakistan. In addition to his
brand building responsibilities, he oversaw all functional and personnel matters in
these countries.
Mr Kartik Natarajan, CFO has been with P&G for over 15 years. Prior to this role, he
has worked across multiple locations including US, China, Philippines and Singapore.
He has held global responsibilities and has led strategy development, business &
financial planning and operational execution with excellence for several important
P&G businesses over his tenure with P&G.
Mr Rajwani and Mr Natarajan are also MD and CFO of P&G’s other two entities in
India, P&G Home Products and Gillette India.
April 2016
33

P&G Hygiene and Health Care
Financials and Valuations
Standalone - Income Statement (INR Million)
Y/E June
Income from Operations
Less: Excise Duty
Total Income from Oper.
Change (%)
Raw Materials
% of Sales
Employees Cost
% of Sales
Other Expenses
% of Sales
Total Expenditure
% of Sales
EBITDA
Margin (%)
Depreciation
EBIT
Int. and Finance Charges
Other Income
PBT bef. EO Exp.
PBT after EO Exp.
Total Tax
Tax Rate (%)
Reported PAT
Adjusted PAT
Change (%)
Margin (%)
FY11
10,400
368
10,032
8.5
3,896
38.8
506
5.0
3,992
39.8
8,394
83.7
1,639
16.3
222
1,417
0
354
1,771
1,771
259
14.6
1,512
1,512
-24.2
15.1
FY12
13,038
64
12,974
29.3
5,243
40.4
647
5.0
5,083
39.2
10,972
84.6
2,002
15.4
281
1,721
0
509
2,230
2,230
417
18.7
1,813
1,813
19.9
14.0
FY13
16,986
118
16,868
30.0
7,045
41.8
997
5.9
6,321
37.5
14,362
85.1
2,506
14.9
313
2,192
0
670
2,862
2,862
830
29.0
2,032
2,032
12.1
12.0
FY14
20,673
164
20,509
21.6
8,128
39.6
950
4.6
7,225
35.2
16,303
79.5
4,207
20.5
352
3,855
54
802
4,603
4,603
1,583
34.4
3,020
3,020
48.6
14.7
FY15
23,599
261
23,338
13.8
9,209
39.5
1,133
4.9
8,152
34.9
18,494
79.2
4,844
20.8
525
4,319
57
746
5,008
5,008
1,547
30.9
3,461
3,461
14.6
14.8
FY16E
26,230
655
25,574
9.6
9,565
37.4
1,304
5.1
8,670
33.9
19,539
76.4
6,036
23.6
622
5,413
62
810
6,161
6,161
1,972
32.0
4,190
4,190
21.0
16.4
FY17E
30,831
1,233
29,598
15.7
11,010
37.2
1,332
4.5
10,389
35.1
22,731
76.8
6,867
23.2
744
6,122
77
822
6,868
6,868
2,232
32.5
4,636
4,636
10.6
15.7
FY18E
36,981
1,479
35,503
19.9
13,172
37.1
1,633
4.6
12,390
34.9
27,195
76.6
8,308
23.4
866
7,441
86
937
8,292
8,292
2,737
33.0
5,556
5,556
19.9
15.6
Standalone - Balance Sheet
Y/E June
Equity Share Capital
Total Reserves
Net Worth
Deferred Tax Liabilities
Capital Employed
Gross Block
Less: Accum. Deprn.
Net Fixed Assets
Capital WIP
Curr. Assets, Loans&Adv.
Inventory
Account Receivables
Cash and Bank Balance
Loans and Advances
Curr. Liability & Prov.
Account Payables
Provisions
Net Current Assets
Appl. of Funds
E: MOSL Estimates
FY11
325
5,682
6,006
28
6,034
3,129
1,225
1,904
76
6,797
653
310
1,300
4,534
2,742
1,828
915
4,054
6,034
FY12
325
6,646
6,970
-15
6,955
3,459
1,475
1,984
289
8,697
923
482
1,824
5,469
4,015
3,097
918
4,682
6,955
FY13
325
7,729
8,053
-30
8,024
3,775
1,626
2,149
412
9,903
1,189
809
1,660
6,245
4,440
2,895
1,545
5,463
8,024
FY14
325
9,704
10,029
-72
9,957
4,281
1,886
2,395
982
11,631
1,185
861
2,691
6,894
5,050
2,934
2,117
6,581
9,957
FY15
325
11,962
12,287
-40
12,247
5,237
2,149
3,088
390
15,960
1,191
1,139
6,186
7,444
7,190
4,570
2,621
8,770
12,247
FY16E
325
14,034
14,359
-44
14,315
6,444
2,771
3,673
382
18,264
1,191
1,191
10,134
5,747
8,004
4,380
3,624
10,260
14,315
FY17E
325
16,326
16,651
-48
16,603
7,592
3,515
4,077
434
21,105
1,379
1,297
12,678
5,751
9,013
5,013
4,000
12,092
16,603
(INR Million)
FY18E
325
19,074
19,398
-53
19,346
8,804
4,382
4,423
422
25,138
1,654
1,556
15,422
6,506
10,636
6,006
4,631
14,501
19,346
April 2016
34

P&G Hygiene and Health Care
Financials and Valuations
Ratios
Y/E June
Basic (INR)
EPS
Cash EPS
BV/Share
DPS (incl tax)
Payout (%)
Valuation (x)
P/E
Cash P/E
P/BV
EV/Sales
EV/EBITDA
Dividend Yield (%)
FCF per share
Return Ratios (%)
RoE
RoCE
Working Capital Ratios
Asset Turnover (x)
Inventory (Days)
Debtor (Days)
Creditor (Days)
Leverage Ratio (x)
Debt/Equity
FY11
46.6
53.4
185.0
26.1
56.1
FY12
55.8
64.5
214.7
26.1
46.8
FY13
62.5
72.3
248.1
29.2
46.7
FY14
92.9
103.9
309.0
32.2
34.6
68.9
61.6
20.7
10.0
48.8
0.5
63.9
33.4
33.8
2.1
21
15
39
0.0
FY15
106.5
122.8
378.5
36.4
34.1
60.1
52.1
16.9
8.6
41.6
0.6
144.1
31.0
31.4
1.9
19
16
47
0.0
FY16E
128.9
148.2
442.3
65.2
50.6
49.7
43.2
14.5
7.7
32.8
1.0
186.9
31.4
31.8
1.8
17
17
49
0.0
FY17E
142.6
165.7
513.0
72.2
50.6
44.9
38.6
12.5
6.6
28.4
1.1
150.6
29.9
30.2
1.8
17
16
49
0.0
FY18E
171.0
197.9
597.6
86.5
50.6
37.4
32.4
10.7
5.4
23.2
1.4
171.1
30.8
31.1
1.8
17
16
50
0.0
0.4
-5.4
26.6
26.6
1.7
22
11
62
0.0
0.4
42.3
27.9
27.9
1.9
22
11
58
0.0
0.5
24.2
27.1
27.1
2.1
23
14
50
0.0
Standalone - Cash Flow Statement
Y/E June
Reported profit after tax
Depreciation
Provisions
Deferred Taxes
(Inc)/Dec in WC
CF from Operations
Others
CF from Operating incl EO
(Inc)/Dec in FA
Free Cash Flow
(Pur)/Sale of Investments
Others
CF from Investments
Issue of Shares
Inc/(Dec) in Debt
Dividend Paid
Others
CF from Fin. Activity
Inc/Dec of Cash
Opening Balance
Closing Balance
FY11
1,512
99
5
6
-1,683
-60
-3
-64
-111
-175
0
0
-111
0
0
-849
0
-849
-1,024
2,324
1,300
FY12
1,813
250
3
-43
-107
1,916
0
1,916
-543
1,373
0
0
-543
0
0
-849
0
-849
524
1,300
1,824
FY13
2,032
151
627
-14
-1,571
1,225
0
1,225
-439
786
0
0
-439
0
0
-949
0
-949
-163
1,824
1,661
FY14
3,020
260
571
-42
-659
3,150
0
3,150
-1,075
2,075
0
0
-1,075
0
0
-1,044
0
-1,044
1,031
1,661
2,691
FY15
3,461
263
504
32
802
5,063
-22
5,041
-364
4,677
0
0
-364
0
0
-1,182
0
-1,182
3,495
2,691
6,186
FY16E
4,190
622
1,003
-4
1,455
7,266
0
7,266
-1,200
6,066
0
0
-1,200
0
0
-2,118
0
-2,118
3,948
6,186
10,134
(INR Million)
FY17E
4,636
744
376
-4
336
6,087
0
6,087
-1,200
4,887
0
0
-1,200
0
0
-2,343
0
-2,343
2,544
10,135
12,678
FY18E
5,556
866
631
-5
-296
6,753
0
6,753
-1,200
5,553
0
0
-1,200
0
0
-2,809
0
-2,809
2,744
12,679
15,422
April 2016
35

P&G Hygiene and Health Care
NOTES
April 2016
36

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