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Gillette: Sharp cut…

Aug 10, 2005

Performance Summary
Shaving products major Gillette announced its 2QCY05 (June quarter) results recently. The company reported a decent topline growth, backed by the growth in its grooming business. However, margins continued to be under pressure and declined by 640 basis points, resulting in the bottomline taking a dip. Had there not been a rise in other income, the bottomline picture would have been even bleaker.

(Rs m) 2QCY04 2QCY05 Change 1HCY04 1HCY05 Change
Net Sales 1,001 1,121 12.0% 2,006 2,196 9.5%
Expenditure 702 857 22.1% 1,390 1,664 19.7%
Operating Profit (EBTDA) 299 264 -11.8% 617 533 -13.6%
EBITDA margin (%) 29.9% 23.5% 30.7% 24.3%
Other Income 36 46 26.9% 76 83 10.2%
Depreciation 39 37 -4.1% 79 74 -5.9%
Profit before Tax 296 272 -8.1% 613 542 -11.6%
Tax 105 97 -8.1% 225 197 -12.4%
Profit after Tax/(Loss) 191 176 -8.1% 388 344 -11.2%
Net profit margin (%) 19.1% 15.7%   19.3% 15.7%  
No. of Shares (m) 32.6 32.6   32.6 32.6  
Diluted Earnings per share (Rs)* 23.5 21.6   23.8 21.1  
P/E ratio (x)         32.2  
*(annualised)            

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, was recently bought over by P&G globally, which is likely to lead to a merger of Indian operations too.

What has driven performance in 2QCY05?
Grooming: As can be seen from the table below, the grooming segment (blades, razors and personal care) that accounted for 78% of revenues in 2QCY04 reported a good growth of around 17% YoY and currently contributes to 81% of revenues. However, the margins in this segment were hit to a great extent, down from 40% to 29%. Gillette India imports Mach3 and Sensor Excel (high end) blades and razors for which it earns only a marketing margin, while Gillette Vector Plus (mid priced), was especially developed to cater to the Indian market, due to its technology that enabled low water usage. The company also caters to the lower end of the market by offering 7'O clock razor systems. Both 'Vector Plus' and “7'O clock” are manufactured in India.

segment snapshot
(Rs m) 2QCY04 2QCY05 % change
Grooming 777 906 16.7%
PBIT 311 264 -15.2%
margin (%) 40.1% 29.1%
% of sales 77.6% 80.9%
Portable power 81 67 -17.2%
PBIT 11 18 61.1%
margin (%) 14.0% 27.1%  
% of sales 8.1% 6.0%  
Oral Care 143 148 2.9%
PBIT 35 45 27.4%
margin (%) 24.4% 30.2%  
% of sales 14.3% 13.2%  
Total Segment Revenue 1,001 1,121
PBIT 357 327  
margin (%) 35.7% 29.1%  

Portable power: The company markets the parents 'Duracell' range of batteries in India. India being a price sensitive market prefers to use regular zinc batteries rather than alkaline (Duracell) batteries, which are priced almost 3 times the normal one. On the revenues side, the company saw a dip of over 17% YoY due to lower offtake. However, margins more than made up for the revenue loss, which expanded from 14% to 27% in the June quarter. A couple of years back, Gillette had hived off the Duracell battery plant at Manesar to cut back on its fixed costs.

Oral Care: Gillette India markets the 'Oral-B' range of products in India and saw a marginal growth in revenues during the quarter. However, margins were lower than in 2QCY04.

Cost break-up
As % of revenues 2QCY04 2QCY05
Raw material 30.5% 35.4%
Advertising expenses 10.7% 15.1%
Staff 9.9% 10.0%
Others 19.1% 16.0%
Total expenditure 70.1% 76.5%
Overall margin picture: As can be seen from the table, raw material and advertising expenditure have increased significantly, resulting in the bleak bottomline picture. The management had indicated in 1QCY05 that advertising expenditure would be in the neighborhood of 12% of sales, however during the quarter, they were higher at over 15% of sales.

Over the last few quarters
1QCY04 2QCY04 3QCY04 4QCY04 1QCY05 2QCY05
Sales growth 17.2% 5.0% 16.0% 9.9% 7.0% 12.0%
Operating margins (%) 31.6% 29.9% 22.3% 9.6% 25.0% 23.5%
Advertising to sales (%) 7.1% 10.7% 18.1% 21.4% 12.0% 15.1%
Net profit growth (%) 140.9% 1.7% -8.2% 694.2% -14.4% -8.1%
Grooming business growth (%) 20.3% 4.3% 17.3% 17.0% 4.7% 16.7%

As can be seen from the above table, the company's advertising and promotional spend has been rather high as it is largely a single segment company and this will continue to be so due to increasing competition.

What to expect?
At the current price of Rs 680, the stock is trading at 32.2 times its annualised 1HCY05 earnings and market capitalisation to sales of 5x.

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 leaves little on the table for investors. By all parameters, it looks that the company may be headed for a delisting and therefore, an open offer is a possibility. But with valuations already rich, an upside from the current levels should be difficult to come by.

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