|An investment in Procter & Gamble India 12 years ago would have grown 10-fold to date. With a clutch of quality products, a manufacturing line generating steady income, and the backing of a really strong parent, P&G India looks set to generate comparable stock returns in years to come. |
Procter & Gamble, USA (P&G) owns 65 per cent of P&G India's equity. The multinational has built many world class brands, like Pampers, Head & Shoulders, Ariel, Ivory, Tide, Vicks, Whisper, Crest and Pantene. Nearly all are market leaders in Europe and the United States. This leadership, along with a presence in 140 countries, helps give P&G annual sales of over $35 billion. P&G's products have a strong presence in India too. Its Vicks brand has virtually become a generic cough and cold treatment. And Whisper picked up a 45 per cent share of the feminine hygiene products market in a short period.
P&G concentrates less than its rivals do on volume growth. Says A.R. Kathiresan, managing director, Securities Capital: "P&G prefers to stay in the premium segment. It identifies a market, introduces a superior product, as it did with Whisper, and then works backward to cut costs and increase profits."
Stock markets love companies that do this, because the strong brands justify premium pricing, the gains from which go straight to the bottom line when costs are cut. Such stocks often outperform their rivals in a rising market. The strength of the brands also sustains such companies when times are hard, so they tend to avoid the worst of the market's falls, making them excellent defensive stocks.
Analysts say about a third of P&G India's Rs 388 crore sales in the year to June 1997 came from contract manufacture of Pantene shampoos and Ariel detergent concentrate for P&G's 100 per cent subsidiary, P&G Home Products. In handing over these brands, P&G India traded off the heavy initial losses of brand promotion for the security of a steady income from simply manufacturing the product. However, this also means it won't get the long term value-addition from the brand. Says Manish Chordia, fund manager at LIC Mutual Fund: "The steady income from contract manufacturing is generally lower than that from selling branded products."
P&G India has some enduring brands in Old Spice (shaving products) and Clearasil (skin care), though both are dwarfed by its two big money spinners. One is the Rs 180 crore Vicks brand. P&G sells more Vicks -- 400,000 tonnes of the stuff -- in India than anywhere else in the world. It has one of the highest brand recall values in India. P&G India's product extensions like Vicks Vaporub, Vicks Action 500, Vicks Inhaler and Vicks Sinex have been very successful. Today, Vicks leads its segment, ahead of competitors Zandu and Amrutanjan.
Volume growth may be single digit, but there are several value-adding Vicks product extensions yet to reach the Indian market. P&G is thinking big for Vicks, with brand extensions, a capacity expansion at the Goa plant, and exports of Vicks Vaporub to countries like Japan and Singapore. Chordia expects the Vicks and Old Spice business to grow at 14-15 per cent annually, while Kathiresan sees an 18 per cent annual growth in value terms for the Vicks brand.
P&G India's other big brand is Whisper. Users swear by its quality and don't mind buying it at a premium over rival products. The payoff for P&G India: Whisper has successfully broken the decades-old monopoly of Johnson & Johnson's Stayfree, and cornered a market share of about 45 per cent.
Feminine hygiene products still have a relatively low penetration in the Indian market. Even if 15 per cent of the target market, say 50 million women, were to start using them, the market size would approach Rs 1,000 crore. Says Kathiresan: "Whisper should be the company's growth engine, and should grow at over 20 per cent in value terms in the coming five years." Chordia is even more bullish, expecting a 35 per cent growth.
Low value contract manufacturing may form a significant part of revenues. But the strength of Vicks and Whisper, and the keen interest of a parent known for its ability to constantly innovate, control costs and strengthen brands, should ensure steady growth in income and a premium stock market valuation for Procter & Gamble India.
The current price of Rs 671 per share offers a good entry point for the stock. As Kathiresan explains: "P&G had taken approval to buy back shares worth Rs 85 crore, and the share price rose fast in anticipation. Once the market realised that the Budget had nothing to say about buy backs, the stock price fell sharply."
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