P&G Health 2022 Update

Market Cap :₹ 7,230

P/S : 6.5x
PE: 29x

3/17/2022 1
Industry Size & Growth
• Industry Size of Vitamins , Minerals & Nutrients(VMN) is of 15000crs which is 8.9%
of entire Indian Pharma Markert(IPM) of 1,69,000 Crs (Feb22)

• VMN has grown 10.6% in last 16 quarters which is faster than entire IPM
growth of 9.8% on back of higher adoption of VMN post covid

3/17/2022 2
Company Growth Market share
• Company grew 13% last year, and 7% in last 2 years. Clocking 275+crs run rate from last 3 quarters vis-à-vis
~220-230crs in previous year.
• This is second year since complete P&G transition has taken place.
• Company is leader in VMS space with around 6% market share of entire VMS. Neurobion has a 12.5%
market share and Livogen has a 5% market share in its category.
• 2 years back company had taken 10% price hike across portfolio. Still its one of most affordable vitamins
available in market with room for some price increases.
• Same year company has also increased the pack size from 10 to 30 to increase the volumes.
• Company should be able to take price hike to the tune of 10% every 3 years and grow the volumes by 8-
10% thus able to grow realistically at 12-14%.
• Company did not participate in Zinc + Vit C euphoria of Covid-19 suggesting that it is not a long term
game. (Becosules largest brand ~400crs from Pfizer came up with Becosules Z “Vit C+Zinc” to cash in the
trend similar to other competitors like Supradyn & Revital )
• Zicovet from Apex labs made more than 340 crs+ revenue last year riding on the trend.

3/17/2022 3
 Top brands & New Launches
• It has optimised its portfolio for six brands namely, Neurobion, Polybion, *Based on FY2020 AGM comments
Livogin, Evion, Nasivion and Seven Seas. Neurobion is 200crs+ brand.
• Top 5 brands now contribute 87% of sales v/s 80% earlier.
• The company has launched new formulations under Livogen, Polybion and
Seven Seas in FY20 such as New Livogen Iron and MultivitaminTonic,
Polybion Active Syrup. It registered sales of 12 crs from new products.
• Dvion is a Vitamin D brand from the company.
• In FY21 they have launched new SKUs from our Neurobion franchise,
Neurobion alfa and alfa D.
• So far in FY22 they have relaunched the old brand COSOME which is cough
syrup and cold-cough medicine. This brand was discontinued in 2016 by
Merck because of some regulatory issue.
• However, company reiterated multiple times that they will focus on Top 5
brands using extensions for their growth strategy.
• So far there is no clarity on launches from Parents OTC portfolio.

3/17/2022 4
Sales and Marketing & Distribution
• The total relevant universe for OTC business is 550,000 outlets. Each of Merck’s products are at different point of distribution reach –
Ranging from 40k to 400k depending upon the demand (of total 550k pharmacies in tier1-6 where they are targeting). It can’t push
products to pharmacies as there is no demand and all unsold products will be returned back.
• It follows a hybrid model for sale of products, i.e. prescription, distributors and TVC. The Sales and distribution expense has been
around 8-9% over the years
• The management understands that it’s very difficult to build brands. Thus it is investing in top brands and launching their line extensions
and increasing distribution reach. It is prioritising high margin brands like Livogen. Sales promotion expenditure to remain at existing
levels.
• It has 2700 distributors of which 98% are one with drug licence. Only distributors with drug licence can sell these products and thus it
cannot capitalise on P&G group’s distribution network in India.
• This year agm they suggested they have increased its distribution network. Also reduced the margins and credit period for its
distributors.
• All the vitamins sold are drug category and not direct consumer supplements category which falls under FSSAI. This is because the once
which fall under FSSAI have to follow daily dose limits. Seven Seas Perfect 7 multi vitamin is such product which is available only on
ecommerce
• It launched a new direct to consumer sales channel during the year. Currently it’s very small and most of the sales continue to be
generated through doctors.
• It employs 600 MR’s . Makes Productivity at 1.45Crs similar to other MNC players. MR attrition has gone down to 9% (industry 24%)
after P&G takeover. Increase in gratuity was one-time expense to align it with P&G global policies
• There are some synergies from integration with P&G in terms of operations

3/17/2022 5
Exports & DPCO
• 12 % of company’s revenue from outside India which stood flat at 122 crores.
• Company sells Finished dosages products to third parties based out of Asia including Sri
Lanka, Nepal, Myanmar & Maldives and API to Austria Plant. Four of your Company’s brands
were ranked among the Top 10 brands in the Industry in Sri Lanka
• Exports of finished goods were 89crores while export of APIs to Austria plant was 33crores.
• It has 4 crores of sales under NLEM. Products under DPCO are less than 1% of revenue (6
SKU’s out of total 53 SKU’s).
• It doesn’t have any raw material imports from P&G group companies. Merck used to import
raw materials from the parent and that has been discontinued now. This would lead to higher
margins. However, P&G HL is exporting some finished goods to its Austrian sister concern.
• The entire pharma industry is dependent on China for APIs, and so is PGHL.

3/17/2022 6
 Capital allocation
• Royalty: The company paid 2% of domestic sales as royalty and
4% royalty was paid on exports. 19.75crs was paid in FY21
• Cash in hand : 464 crs and around yearly 200+ crs cash
generation runrate.
• Intercompany loans: Company does not give any Intercompany
Loans
• Dividend : Company doesn’t need capital to grow , It has shared
complete proceeds of sale of chemical business back to
shareholders and would continue to pay out most of the cash
generated as dividends.
• Around 2% dividend yield at current prices.

3/17/2022 7
 Operation Matrix CY15 CY16 CY17 CY18 FY20 FY21 Q-1_FY2022 Q-2_FY2022 Q-3_FY2022
Profit & Loss (Rs Cr)
Net Sales 939.50 992.56 698.13 848.99 1355.86 1008.73 272.80 277.90
Net Sales % 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Y-O-Y Growth % 8.30% 5.65% -29.66% 21.61% 502.15% -25.60% 13.56% 26.81% -100.00%
Gross Profit 502.31 581.02 461.19 579.63 924.42 693.91 190.27 187.56 0.00
Gross Profit (% of Net Sales) 53.5% 58.5% 66.1% 68.3% 68.2% 68.8% 69.7% 67.5%
Y-O-Y Growth % 8.62% 15.67% -20.62% 25.68% 527.95% 310.57% 7.72% 23.10% -100.00%
Employee Cost 123.17 154.23 109.88 131.27 182.93 150.47 39.51 41.00
Employee Cost (% of Net Sales) 13.1% 15.5% 15.7% 15.5% 13.5% 14.9% 14.5% 14.8%
Y-O-Y Growth % 8.46% 25.22% -28.76% 19.47% 504.39% 288.91% 17.98% 9.20% -100.00%
Other Manufacturing Expenses 70.81 58.36 69.14 72.37 122.71
Other Manufacturing Expenses (% of Net Sales) 7.5% 5.9% 9.9% 8.5% 9.1% 0.0% 0.0% 0.0%
Y-O-Y Growth % -3.90% -17.58% 18.47% 4.67%
General and Administration Expenses 116.30 141.55 82.02 98.78 153.23
General and Administration Expenses (% of Net Sales) 12.4% 14.3% 11.7% 11.6% 11.3% 0.0% 0.0% 0.0%
Y-O-Y Growth % -10.85% 21.71% -42.06% 20.43%
Selling and Distribution Expenses 84.61 81.36 90.72 115.66 118.96 86.43
Selling and Distribution Expenses (% of Net Sales) 9.0% 8.2% 13.0% 13.6% 8.8% 8.6% 0.0% 0.0%
Y-O-Y Growth % 20.12% -3.84% 11.50% 27.49%
Advertisement & Sales Promotion 71.90 66.65 79.17 99.33 118.96 86.43
Advertisement & Sales Promotion (% of Net Sales) 7.7% 6.7% 11.3% 11.7% 8.8% 8.6% 0.0% 0.0%
Y-O-Y Growth % 15.63% -7.30% 18.78% 25.46%
Miscellaneous Expenses 8.84 14.99 27.12 5.18 14.85 297.42 72.69 84.72
Miscellaneous Expenses (% of Net Sales) 0.9% 1.5% 3.9% 0.6% 1.1% 29.5% 26.6% 30.5%
Y-O-Y Growth % 60.73% 69.57% 80.92% -80.90% -77.85% 469.55% 33.62% 0.74% -100.00%
Less: Expenses Capitalised
Total Expenditure 856.06 876.99 627.50 704.85 1041.52 762.71 194.73 216.06 0.00
Total Expenditure (% of Net Sales) 91.1% 88.4% 89.9% 83.0% 76.8% 75.6% 71.4% 77.7%
Y-O-Y Growth % 5.87% 2.44% -28.45% 12.33% 494.24% 310.35% 28.56% 14.67% -100.00%
Operating Profit (Excl OI) 83.44 115.57 70.63 144.14 314.34 246.02 78.07 61.84 0.00
Operating Profit (Excl OI) (% of Net Sales) 8.9% 11.6% 10.1% 17.0% 23.2% 24.4% 28.6% 22.3%
Y-O-Y Growth % 41.64% 38.51% -38.89% 104.08% 529.94% 215.01% -12.03% 101.24% -100.00%
Profit After Tax 53.56 79.13 93.91 838.72 254.08 176.80 55.37 44.84 0.00
Profit After Tax (% of Net Sales) 5.7% 8.0% 13.5% 98.8% 18.7% 17.5% 20.3% 16.1%

3/17/2022 8
Valuation 0 0.25 1.25 2.25 3.25
Terminal Valuation:
FORECAST HORIZON
4.25 5.25
6.0%

6.25
4,285

7.25 8.25 9.25

CAGR%
FY22 FY23 FY24 FY25 FY26 FY27 FY28 FY29 FY30 FY31 FY32
PBT Margin 26.0% 26.0% 27.0% 27.0% 27.0% 27.0% 28.0% 28.0% 28.0% 28.0%
Tax rate 25.0% 25.0% 25.0% 25.0% 25.0% 25.0% 25.0% 25.0% 25.0% 25.0%
Effective Corporate Tax Rate 25.0% 25.0% 25.0% 25.0% 25.0% 25.0% 25.0% 25.0% 25.0% 25.0%
Prior year Net Sales (in crores) 1110.00

Net Sales 1,243 1,392 1,559 1,747 1,956 2,191 2,454 2,748 3,078 3,447 12.0%
Sales Growth 12% 12% 12% 12% 12% 12% 12% 12% 12% 12%
PBT 323 362 421 472 528 592 687 770 862 965
Less: Cash taxes 81 91 105 118 132 148 172 192 215 241
NOPAT 242 272 316 354 396 444 515 577 646 724

Less: Incremental working Capital Investment 19 21 24 27 30 34 38 42 47 53

12 13 15 16 18 21 23 26 29 32

Add: Tax Shield

Free Cash Flow to the Firm [FCFF] 212 237 277 310 348 389 455 509 570 639 13.1%
Present Value Interest Factor [PVIF] 0.97 0.87 0.77 0.69 0.62 0.55 0.49 0.44 0.39 0.35
Present Value of FCFF 206 206 215 215 215 215 224 224 224 224
Cumulative present value of FCFF 206 412 626 841 1,056 1,271 1,495 1,719 1,943 2,166

Present value of Terminal Value 4483

12790.19
Value of Operating Assets 6650 Exit PE 18.89114
Add: Non-operating assets 464
Less: Market value of Debt 0

Shareholder value / Intrinsic equity value 7114

Intrinsic equity value per share 4285

Valuation Matrix
Growth
##### 10% 11% 12% 13% 14%
Terminal

5% 3,401 3,631 3,878 4,144 4,430

Value

6% 3,742 4,003 4,285 4,589 4,917

7% 4,218 4,525 4,856 5,213 5,598

3/17/2022 9
Recommendation
• P&G health is business qualifies in most of the M3 criteria’s of good ROE ,
prudent management & Some Moat(branded OTC Pharma)
• Company is quoting at reasonable valuations in terms of absolute DCF
(Intrinsic value range of Rs4000-4300) or lower end of PE (29x) & P/S (6.5x)
• Globally P&G historically is available at 25PE for 4% to 5% revenue growth
expectation. Thus, company with higher growth and better margins is
available at almost similar price.
• If company is able to grow more than Industry growth of 10-12% than it could
give an upside surprise.
• M3 can invest in the company at current levels for capital appreciation
expectations of 12%-14% & 2% from dividend yield . Thus, total returns of 14-
16% is possible.

3/17/2022 10
 THANKS

3/17/2022 11