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Gillette: The magic's not working

Jul 29, 2004

Introduction to results
Shaving products major, Gillette India, has reported lower than expected topline growth during the June quarter. The company clocked just 5% revenue growth and net profit was up a marginal 2% during the said quarter. A dip in operating margins (almost 400 basis points) also added to woes.

(Rs m) 2QFY04 2QFY05 Change 1HFY04 1HFY05 Change
Net Sales 953 1,001 5.0% 1,811 2,006 10.8%
Other Income 31 36 16.8% 59 76 27.7%
Expenditure 631 702 11.3% 1,309 1,390 6.2%
Operating Profit (EBDIT) 322 299 -7.3% 502 617 22.8%
Operating Profit Margin (%) 33.8% 29.9%   27.7% 30.7%  
Interest 0 0 - 0 0 -99.0%
Depreciation 47 39 -16.5% 86 79 -8.1%
Profit before Tax 307 296 -3.5% 475 613 29.0%
Extraordinary items -13 0 - -21 0 -
Tax 106 105 -1.1% 185 225 22.1%
Profit after Tax/(Loss) 188 191 1.7% 270 388 43.9%
Net profit margin (%) 19.7% 19.1%   14.9% 19.3%  
No. of Shares (m) 32.6 32.6   32.6 32.6  
Diluted Earnings per share (Rs)* 23.1 23.5   16.5 23.8  
P/E ratio (x)         25.0  
*(annualised)            

What is the company's business?
Gillette India is the 52% subsidiary of US shaving major - Gillette USA. The company has just come back into the black in 2003 after a spate of restructuring in 2001 and 2002. These years saw Gillette hive off its battery manufacturing plant (Duracell) at Manesar. 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 products major, which also markets the Duracell range of batteries.

What has driven performance in 1QFY05?
Sales:  After reporting a strong 17% topline growth in the first quarter (March quarter) of 2004, there was expectation that Gillette is on its way to a higher growth trajectory. The company had introduced 'Vector plus' a shaving product in the mid-priced segment, which it hoped will drive volumes. This has clearly not happened, as is evident from its June quarter performance.

Over the last four quarters
  3QFY04 4QFY04 1QFY05 2QFY05
Sales growth (YoY) -13.3% -2.9% 17.2% 5.0%
OPM (%) 30.4% 5.1% 31.6% 29.9%
Advertising to sales (%) 9.2% 27.3% 7.1% 10.7%
Net profit growth (YoY) 109.9% Not comparable 140.9% 1.7%
*4QFY04 profit stood at Rs 9 m, as compared to (33 m) loss in 4QFY03

Margins:  The company's operating margins took 400 basis points hit during the quarter. Though the company's raw material cost rise is not comparable owing to some change in classification of materials, staff costs and advertising expenses too increased. Advertising expenses as a percentage of sales went up to 10.7% during the quarter. It indicates the push the company is trying to give its products, especially Vector Plus. But clearly it has not worked in the June quarter. Consequent to the dip in margins, profit growth too has shrunk.

Cost break-up
as a % of net sales 2QFY04 2QFY05 1HFY04 1HFY05
Raw material 28.3% 30.5% 34.2% 31.0%
Staff 9.0% 9.9% 9.6% 9.5%
Advertising and sales promotion 7.3% 10.7% 6.9% 8.9%
Others 21.6% 19.1% 21.5% 19.8%
Total expenditure 66.2% 70.1% 72.3% 69.3%

What to expect?
At Rs 596, the Gillette stock trades at a rich valuation of 25x annualised 1HFY05 earnings and market cap. to sales of 4.8x. These valuations were in anticipation of continued high growth. The June quarter numbers have raised some concerns over this. The long term potential for Gillette products is enthusing, but clearly its early days yet.

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