P&G's Growth Hinges on Good Execution in China and India

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Procter & Gamble's ( PG ) CEO, Robert McDonald, set out on an ambitious plan to acquire one billion additional consumers by 2014-15 and where else would have P&G found a billion untouched consumers but in the two most populous nations, China and India? Standing in its way are competitors like Unilever ( UL ), Clorox ( CLX ), and Colgate-Palmolive Co. ( CL ) in the consumer products businesses and companies like L'Oreal ( LRLCY ), Avon (AVP) and Estee Lauder (EL) in the personal care and beauty segments that are also trying to push further into these markets.

We currently have an $84 price estimate of Procter & Gamble's stock here, which is around 30% ahead of the market price.

The "Chindia" Opportunity

Despite a global presence with over 32% sales already coming from emerging economies, the mission naturally translated into focusing on China and India. It comes as little surprise then that P&G has launched lower-priced product extensions of its global premium brands such as Tide and Gillette targeted atconsumers with lower disposable income levels in these economies and expanded its distribution network to cover the previously inaccessible rural areas.

While the developed economies of US and Western Europe continue to constitute over 41% and 21% of sales respectively, going forward much of the growth is expected to come from the emerging economies, which have been exhibiting robust double-digit growth primarily on account of expanding middle class with rising disposable income levels and high population growth rates.

There's no doubt that the strategy seems to have fared well until now. While P&G continues to beat the market expectations, further raising its outlook for sales growth to 7% for the year ahead, other players such as Kimberly Clark have issued downside guidance for the full year with sales growth expected to be around 2%. Amidst much optimism, what raises our concerns is P&G's increasing exposure to China and India!

Detergents & Household Cleaning Products

The detergents & household cleaning segment accounts for about 24% our $84 Trefis price estimate of Procter& Gamble's stock.

In 2009, P&G launched Tide Naturals , targeting the lowest income consumers in India and drew market share from the regional players, which have historically led the Tier-III consumers segment. This was also made possible by P&G expanding its distribution network to the remote rural India.  We currently estimate a market share growth in laundry segment from 31.7% in 2010 to 32.6% by 2016 from gaining share from local players in China and India. If however P&G were to lose volumes to regional players, we foresee the market share to gradually decline to historical levels of close to 30.5% leading to a 1 % potential downside to our current Trefis price estimate for Procter & Gamble's stock.

While China and India do bring in volumes, what sells more here are the lower-priced and lower-margin products. Hence, we expect the EBITDA margins for the overall detergents & household cleaning segment to decline gradually with increasing proportion of lower-margin product sales in emerging economies. Also, to compete with the local players, P&G would have to sacrifice margins for targeting higher volumes.

We currently estimate EBITDA margins to decline from 26.4% in 2010 to 25.8% in 2016. However to match up to local competition, if P&G were to pass on the margins to the highly price-sensitive consumers in the form of discounted prices, P&G's expansion into China and India could lead to a decline in EBITDA margins to 23% by 2016, resulting in another near 4% potential downside to our current Trefis price estimate of P&G's stock.

P&G has shown a lot of confidence on the consumer markets in China and India and invested heavily in terms of customized products offering and an extensive distribution network. We estimate that if the investments do not reap the expected benefits, P&G's stand around 5-10% of our current price estimate from only the detergents and household cleaning segment alone.

You can see our detailed $84 Trefis price estimate of Procter & Gamble's stock here .

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.



This article appears in: Investing , Investing Ideas , Stocks , US Markets

Referenced Stocks: CL , CLX , LRLCY , PG , UL

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