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Gillette: Razor's edge

Mar 14, 2005

Synonymous with shaving and a dominant brand in personal grooming, oral care and portable power products, Gillette USA, operates in India through it's 52% subsidiary Gillette India Ltd. Since India is an upcoming economy, let's see what the company's strategy is for this region and evaluate its journey so far. Background
Earlier known as Indian Shaving Products, the company's presence in India is over two decades old. The company was rechristened to Gillette India Limited in CY00, the same year in which it consolidated its Indian operations, by merging all existing businesses in India under a single fold. Gillette India is the 52% subsidiary of US shaving major - Gillette USA. The company's promoter groups' (including the Indian partners) together hold 88.8% in the company. The company recently hived off its battery manufacturing (Duracell and Geep) plant at Manesar and is now a focused shaving product major, which also markets the Duracell range of batteries.

Over the years…
(Rs m) CY00 CY01 CY02 CY03 CY04 1yr YoY change
(CY04 / CY03)
CAGR
Sales 5,168 4,951 3,830 3,631 4,063 11.9% -6%
Other Income 197 166 131 145 189 30.3%
Expenditure 4,694 4,492 3,388 3,092 3,113 0.7% -10%
EBDIT 474 459 442 539 951 76.4% 19%
OPM % 9.2% 9.3% 11.5% 14.8% 23.4%
Net profit after tax(loss) 264 -278 65 448 612 36.5% 23%

From the above table, it is visible that till CY03, the topline declined year by year, but in CY04, the company posted a good 12% growth reflecting a comeback. After the restructuring activities the company has stuck to it's cost cutting programme of 4% every year and this is evident in the bottomline which has grown at a rate of 23% on a compounded basis despite sales falling by 6% over CY00. In the current year, the company achieved record operating margins of 23%, the highest since its two decades of presence in India. During the CY03, the company launched Gillette Vector Plus, with a technology that enabled low water usage, especially developed to cater to the Indian market. It was aimed at the mid-priced segment.

Strategy
The companies' activities are divided into two units, manufacturing and marketing. In India, it manufactures shaving system and cartridges, safety razor blades, torches and components. It markets products in oral care, toothbrushes (Oral B range) and toiletries (shave gels, deo-sprays). The marketed products are imports from the parent's 120 country presence and Gillette India receives only a distribution margin for selling those products. It's top of the line products like Mach 3 and Sensor Excel are also imported, as they are only manufactured at two plants worldwide.

Competition
Gillette has a dominant worldwide market leadership in all its three core categories viz. blades, batteries and toothbrush. In some parts, its blades marketshare is as high as 91%, making it the undisputed leader worldwide. The company protects its technological leadership by designing as well as manufacturing the machines required to manufacture razors as well as cartridges. It also has a number of patents for its brands like Mach 3 and Sensor Excel. However, the latest manufactured offering Gillette Vector Plus was developed in India over a period of 4 years with extensive research and development. In India, it faces competition from Colgate-Palmolive, Godrej Consumer Products and more importantly the local players.

Growth opportunities
The Indian market has not been totally tapped and penetration levels are yet low for its flagship products. In India, the company is aiming to wean away consumers from the traditional double-edged razor segment to twin blade system through its mid-priced offering 'Vector Plus'. If successful, the company could achieve a new growth trajectory. In terms of potential, nearly 90% of consumers still use double-edged razors, a large part of which Gillette can convert. Slowly and steadily, times are changing with Indian men, beginning to place more emphasis on grooming and taking as much time as the fairer sex at the super market to pick up their favourite cologne, deodorant, aftershave lotion, shaving cream, body talc, face wash, shampoo, and conditioner.

What's New
P&G recently acquired Gillette for US$ 57 bn and there may be some minor positive impact, but more negotiating power vis-à-vis global retailers is not going to amount to much. At the same time, the deal creates an enterprise that is unmatched in geographic reach and competitive positioning. Globally, after the acquisition, P&G will become the market leader dethroning Unilever who held the position for a long time.

As far as its Indian operations are concerned, the acquisition is no doubt a big positive for P&G in India. However, investors have to be aware of two factors here. One, P&G, besides the listed company in India, has other 100% subsidiaries in India. In fact, products like Ariel and Pantene are marketed through the 100% subsidiary and the listed entity (P&G Hygiene) has only two major brands in its portfolio i.e. Vicks and Whisper. Even if the deal goes through, it is unlikely that P&G Hygiene will get access to the Gillette folio. They may at best be marketers or manufacturers of some of the Gillette products.

What to expect
The stock currently trades at Rs 625, transforming into a rich valuation of 34x CY04 earnings, which is at the higher end of the spectrum. In India, the company is aiming to wean away consumers from the traditional double edged razor segment to twin blade system through its mid-priced offering 'Vector Plus', and the ‘Gillette Presto' range. As mentioned earlier, nearly 90% of consumers still use double edged razors, a large part of which Gillette is trying to convert.

But all said and done, the low liquidity in the company leaves little on the table for the public investors. By all parameters, it looks that the company may be headed for a delisting and therefore, an open offer. But with valuations already too rich, an upside to this is also limited.


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