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Gillette: Ad push bruises margins - Views on News from Equitymaster
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  • Oct 15, 2004

    Gillette: Ad push bruises margins

    Performance Summary
    Revenue growth of shaving products major, Gillette India, seems to be back on track. After reporting a staid 5% topline growth during the June quarter, the company is back to double digit growth at 16% YoY. However, operating margins took a toll on the company's profitability (down over 8% YoY). On a nine month basis, Gillette has reported nearly 13% topline and around 24% bottomline growth.

    (Rs m) 3QCY03 3QCY04 Change 9mCY03 9mCY04 Change
    Net sales 925 1,074 16.0% 2,736 3,080 12.6%
    Expenditure 644 834 29.5% 1,953 2,224 13.9%
    Operating profit (EBDITA) 281 240 -14.8% 784 856 9.3%
    EBDITA margin (%) 30.4% 22.3%   28.6% 27.8%  
    Other income 42 54 29.0% 101 130 28.3%
    Interest 0 0 - 0 0 -99.0%
    Depreciation 46 39 -14.5% 132 118 -10.3%
    Profit before Tax 278 255 -8.2% 753 868 15.3%
    Extraordinary income/(expense) 0 0 - -21 0 -
    Tax 108 99 -8.2% 293 324 10.9%
    Profit after Tax/(Loss) 170 156 -8.2% 440 544 23.7%
    Net profit margin (%) 18.4% 14.5%   16.1% 17.7%  
    No. of Shares (m) 32.6 32.6   32.6 32.6  
    Diluted Earnings per share (Rs)* 20.9 19.1   18.0 22.3  
    Price to earnings ratio (x)         26.9  

    *(annualised), CY = Calendar Year

    What is the company’s business?
    Gillette India is the 52% subsidiary of US shaving major - Gillette USA. The company's promoter group together hold 88.8% in the company, leaving very little liquidity for the public. 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 3QCY04?

  • Sales: Though we have not received the company's detailed segmental performance break up, we believe a chunk of the revenue growth has been driven by the mid priced offering 'Vector Plus' and its oral care business (Oral B). The company has been pushing the 'Vector Plus' brand aggressively since its launch in early 2004. Just to put things in perspective, till the first half of 2004, the company's grooming business grew by nearly 12% YoY. But the key growth driver during this period was its oral care business, which clocked a strong 32% revenue growth. We believe that this trend has continued for the oral care business and the 'Vector Plus' push too has aided growth.

    Cost break-up
    as a % of net sales 3QCY03 3QCY04 9mCY03 9mCY04
    Raw material 28.3% 31.8% 32.2% 31.3%
    Staff 8.8% 9.6% 9.4% 9.6%
    Advertising and sales promotion 9.2% 18.1% 7.7% 12.1%
    Others 23.2% 18.1% 22.1% 19.2%
    Total expenditure 69.6% 77.7% 71.4% 72.2%

  • Margins: The company's operating margins took over 800 basis points hit during the quarter. The key reason for this erosion in margins was a sharp increase in the company's ad spends. The company's advertising expenses as a percentage of sales almost doubled YoY to 18.1% during the September quarter. It indicates the push the company is trying to give its products, especially Vector Plus. This push has reflected in the company's topline growth, but has impacted profitability.

    Over the last five quarters…
      3QCY03 4QCY03 1QCY04 2QCY04 3QCY04
    Sales growth (YoY) -13.3% -2.9% 17.2% 5.0% 16.0%
    OPM (%) 30.4% 5.1% 31.6% 29.9% 22.3%
    Advertising to sales (%) 9.2% 27.3% 7.1% 10.7% 18.1%
    Net profit growth (YoY) 109.9% Not comparable 140.9% 1.7% -8.2%
    *4QCY03 profit stood at Rs 9 m, as compared to (33 m) loss in 4QCY02

    As is clear from the above table, the company has done much better in terms of revenue growth in 2004 so far. However, its advertising expenses to revenues ratio has constantly seen an uptick during the three quarters of 2004. Consequently, operating margins of the company have continued to see a fall. The company's largely single product focus is a key reason for this trend (shaving products business in nearly 79% of revenues).

    What to expect?
    At Rs 598, the Gillette stock trades at a rich valuation of 26.9 times annualised 9mCY04 earnings and market cap. to sales of 4.8x. These valuations are in anticipation of continued high growth. Though the long term potential for Gillette products is enthusing, but clearly, the pressure on operating margins is likely to continue. Low liquidity in the stock could also be an indication that the management may take the company private. In such a scenario, there is not much for the retail investor to look forward to.



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    Aug 18, 2017 12:40 PM


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