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Steady progress but short-term hiccups - Views on News from Equitymaster
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  • Jul 14, 2001

    Steady progress but short-term hiccups

    Warren Buffet once commented, “I go to sleep in peace every night realising that every morning when I wake up, millions of men will wake up with me and shave”. Mr. Buffet made this happy reference while explaining his rationale for investing in the shaving products major, Gillette. For Gillette India, the same rationale holds true.

    Gillette India is a significant player in the Rs 5 bn Indian shaving blade market. It has over 40% market share (in value terms) in the shaving products business. Its products are marketed under two main umbrella brands; 7 'O Clock and Gillette. But it is not as if Gillette has conquered the Indian market from day one. Gillette’s path to progress in India has been slow but steady. Infact, it took Gillette India nearly 16 years to reach where it is today.

    Gillette entered India in 1984 by the name of Indian Shaving Products Limited (ISPL). At that time ISPL was a joint venture promoted by the Poddar group and the Gillette Company, US, to manufacture stainless steel razor blades. Gillette had a minority 24 percent stake in ISPL’s equity. It granted ISPL the right to use its trademark 7O'Clock as the brand name for razor blades, razors and other shaving systems.

    In 1985, the company came out with an IPO for raising Rs 26 million to fund the setting up of its plant at Bhiwadi in Rajasthan. In the next couple of years, the company took over the entire share capital of Sharpedge Ltd, a sick company, to improve its sales and distribution network and increase capacity. During the same year, the company launched its first product, 7O'Clock Ejtek blades. During the late eighties, ISPL enhanced its shaving product folio and launched shaving brushes, P-II shaving systems with a metal spine and shaving creams under the brand name 7O’Clock Ejtek.

    During the mid-nineties, the company's product range widened with new products being introduced in the market namely, Gillette Presto ready shaver, 7O'Clock Ready-II shaver, Gillette Sensor Excel shaving system, Gillette shave gel, conditioners, deodorants, etc. It also started distributing Oral B toothbrushes, Duracell range of batteries and Luxor and Parker pens.

    (Rs m) Mar-96 Mar-97 Mar-98 Dec-98 Dec-99 Dec-00 CAGR
    Sales 862 1,196 1,666 1,516 2,509 5,173 43.1%
    Gross profit 147 205 266 257 455 452 25.2%
    PAT 43 60 124 131 194 264 43.8%
    GPM 17.1% 17.1% 16.0% 17.0% 18.1% 8.7%  
    NPM 5.0% 5.0% 7.4% 8.6% 7.7% 5.1%  

    If we evaluate Gillette’s progress in India, it has been in sync with India’s economic growth. As the Indian middle class income levels rose, Gillette kept on adding advanced shaving products to its Indian product folio. Very early on, Gillette seemed to have realised India’s future potential. It started on a very small note in the country but enhanced its presence and stake (currently 72 percent) as the economy progressed.

    In the last five years not only has Gillette enhanced its range in men’s shaving products, it has also entered the women's shaving product segment. In 1998, the company decided that it would use Gillette as its pre-eminent brand placing it ahead of the 7O'Clock brand. Finally, Gillette had arrived in India.

    In the past six years, Gillette India’s turnover and net profit have grown at a compounded rate of 43% each. The growing importance of India as a market for Gillette, USA can be gauged from the fact that Gillette launched its new ‘Mach-III’ razor simultaneously in the US and India.

    However, despite all this, the Gillette India stock has declined by a huge 60% in the last one year. This is because it bought into Duracell (manufacturer of alkaline batteries) and Wilkinson Swords (shaving blades) in the past year. Post amalgamation, the company’s expenditure has shot up (interest outgo was up 88 percent and depreciation 150 percent in the quarter ended March 2001).

    Though these amalgamations (especially with Wilkinson) will help Gillette make inroads into the lower segment of the shaving products market, the profit margins will remain depressed since both the amalgamated companies are making meager profits. As the Indian market gets flooded with cheaper south east Asian alkaline batteries, Duracell is likely to continue to face difficult conditions.

    But on the longer term, Mr. Buffet’s enthusiasm on Gillette holds true for a growing economy like India too.



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