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Gillette: Grooming well...

Mar 13, 2006

Introduction to results
Shaving products major, Gillette, reported a good set of numbers for the December quarter. While the topline growth was good, bottomline outpaced topline by miles, mainly due to margin expansion. Operating margins improved both in the quarter, as well as for the full year. Profit growth however, was stupendous in the December quarter compared to a relatively staid 12.3% in CY05.

(Rs m) 4QCY04 4QCY05 Change CY04 CY05 Change
Net Sales 983 1,161 18.1% 4,063 4,530 11.5%
Expenditure 889 923 3.8% 3,113 3,461 11.2%
Operating Profit (EBTDA) 94 238 153.1% 951 1,070 12.6%
EBITDA margin (%) 9.6% 20.5% 23.4% 23.6%
Other Income 59 51 -14.2% 189 179 -5.0%
Depreciation 43 44 2.6% 161 156 -3.0%
Profit before Tax 111 245 121.7% 979 1,093 11.7%
Tax 42 96 126.2% 367 406 10.8%
Profit after Tax/(Loss) 68 150 118.9% 612 687 12.3%
Net profit margin (%) 6.9% 12.9% 15.1% 15.2%
Effective tax rate (%) 38.2% 39.0% 37.5% 37.2%
No. of Shares (m) 32.6 32.6 32.6 32.6
Diluted Earnings per share (Rs)* 18.8 21.1
P/E ratio (x) 44.3

What is the company's business?
Gillette India is the 52% subsidiary of US shaving major - Gillette USA. Further, the company's promoter group together holds 89% in the company, leaving very little liquidity for the public. The company came back into the black in 2003 after a spate of restructuring exercises in 2001 and 2002. These years saw Gillette hive off its battery manufacturing plant (Duracell) at Manesar to a Group company. The period also saw cash infusion from the parent, which helped it restructure and pay of all its debt. It is now a focused shaving product major (core business of shaving products - Sensor Excel, Mach3, 7'O Clock, Vector Plus and toiletries), which also 'markets' the Duracell range of batteries. It also has presence in oral care (Oral B). It must be noted that the parent company, Gillette USA, has been bought over by P&G globally, which is likely to lead to a merger of Indian operations too.

What has driven performance in 4QCY05?
Sales: Though the company's detailed segmental performance break up is not available, we believe a chunk of the revenue growth has been driven by its key brands in the grooming business, like 'Sensor Excel' and 'Mach 3'. The company has continuously brought in new brand extensions, especially in the 'Mach 3' folio. The company's mid priced offering 'Vector Plus' and its oral care business (Oral B) have also performed decently. The company has been pushing the 'Vector Plus' brand aggressively since its launch in early 2004. Just to put things in perspective, in 3QCY05, the company's grooming business grew by nearly 12% YoY. But the key growth driver for this period was its oral care business, which clocked a strong 29% revenue growth. We believe that this trend has continued for the oral care business.

Cost break-up
as a % of net sales 4QCY04 4QCY05
Raw material 36.5% 34.6%
Advertising expenses 21.4% 18.8%
Staff 9.6% 8.8%
Others 22.9% 17.3%
Total expenditure 90.4% 79.5%

Margins: The company's operating margins have been pretty steady through the year. However, as compared to 4QCY04, they seem to be bloated (inspite of it being the lowest in the current quarter) because advertising and other expenditure were considerably higher in that quarter due to new product launches. Raw material prices have also softened.

Over the past few quarters...
4QCY04 1QCY05 2QCY05 3QCY05 4QCY05
Sales growth 9.9% 7.0% 12.0% 9.3% 18.1%
Operating margins (%) 9.6% 25.0% 23.5% 25.5% 20.5%
Advertising to sales (%) 21.4% 12.0% 15.1% 13.8% 18.8%
Net profit growth (%) 694.2% -14.4% -8.1% 23.9% 118.9%
Grooming business growth (%) 17.0% 4.7% 16.7% 12.1% -

What to expect?
At the current price of Rs 935, the stock is trading at 44.3 times its trailing 12-month earnings and market cap to sales of 6.9x. In India, the company is aiming to convert consumers from the traditional double-edged razor segment to twin blade system through its mid-priced offering 'Vector Plus' and the 'Gillette Presto' range. In India, nearly 90% of consumer's still use double-edged razors, which is the target market for Gillette. The management has indicated that advertising costs will be around the current levels in the next few quarters to come, which is what is to be expected of a limited folio FMCG company. As far as the stock is concerned, the low liquidity could see the stock behave volatile, which makes it a high-risk proposition. With valuations already rich, an upside from the current levels should be difficult to come by.

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