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Gillette: Signs of healing - Views on News from Equitymaster
 
 
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  • Apr 2, 2002

    Gillette: Signs of healing

    On the surface Gillette India had a bad 2001. The company finished its financial year with Rs 278 m as net loss. The company also reported a 4% dip in turnover YoY. However, 2001 may well be the base on which Gillette India will launch its expected recovery in 2002.

    (Rs m) 4QFY01 4QFY02 Change FY01 FY02 Change
    Net Sales 3,087 1,524 -50.6% 5,168 4,951 -4.2%
    Other Income 93 64 -30.7% 197 166 -15.8%
    Expenditure 2,868 1,281 -55.3% 4,694 4,492 -4.3%
    Operating Profit (EBDIT) 219 243 11.1% 474 459 -3.3%
    Operating Profit Margin (%) 7.1% 15.9%   9.2% 9.3%  
    Interest 123 46 -62.5% 172 138 -19.8%
    Depreciation 161 82 -49.4% 246 300 22.1%
    Profit before Tax 28 180 550.7% 254 187 -26.4%
    Tax -61 -125   21 -142  
    Extraordinary expenses 31 -636   31 -606  
    Profit after Tax/(Loss) 120 -332   264 -278  
    Net profit margin (%) 3.9% -21.7%   5.1% -5.6%  
    No. of Shares (eoy) (m) 12.9 32.6   12.9 32.6  
    Diluted Earnings per share* 14.7 -40.7   8.1 -8.5  
    *(annualised)            

    True that FY02 has not been a great year for Gillette India. But this has got a lot to do with its Duracell business and its plants than with anything else. The company's Mach 3 brand is reportedly growing at over 35% per annum and the newly bought Wilkinson brand grew by 10% during the year. However, Duracell registered a 4% decline. The Geep line of products is growing at over 9%.

    Gillette has been under pressure ever since it acquired Duracell and Wilkinson in 2000. Though this move added to the company's topline, higher interest and depreciation burden hit the company's profitability. However, the company has taken steps to restructure this anomaly.

    Cost break-up
    (Rs m) FY01 FY02 Change
    Raw material 2,463 2,223 -9.7%
    Staff 294 360 22.5%
    Advertising & selling 523 317 -39.3%
    Others 1,414 1,592 12.6%
    Total expenditure 4,694 4,492 -4.3%

    The company decided to sell Duracell India plant to Duracell Belgium for a consideration of US$ 6.5 m. It closed the Duracell plant at Manesar and consequently took a hit of Rs 606 m for its closure. This component is largely the reason for Gillette India ending FY02 in red. The 50% decline in 4QFY02 is also brought about by the Duracell closure. A major positive for the company is the capital grant of Rs 850 m (US$ 17.5 m) from its parent. The monies realised will be used to retire debts and strive to make Gillette a zero debt company. Also in the coming year, its depreciation will be lower due to the discontinuation of the Duracell plant.

    It is no wonder that the stock has run up by almost 40% in the last three months to Rs 375 levels currently. The year 2002 is expected to be a much better year for Gillette India with low interest and depreciation outgo. However, we believe that the stock is valued at these levels in the medium term.

    Going by the shrinkage of turnover in 4QFY02 (due to Duracell closure), it is likely that Gillette's turnover in FY03 will be significantly lower than FY02. However, even if we assume a flat turnover growth with an improvement in operating margins to 12%, and assume a depreciation of Rs 240 m and an iterest outgo at Rs 50 m, the stock still trades at a relatively high 28x FY03 estimated earnings with the current number of shares outstanding. But Gillette India seems a good investment in the long term owing to the company's management focus, renowned brands and the parent's resolve to concentrate on the Indian shaving products market.

     

     

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