(The most interesting feature of this company is that it is the only subsidiary of a western multinational surveyed to date which closes its books of accounts on June 30. The other subsidiaries close their books on Dec 31 or Mar 31.)
The Chairman of the Board, Mr. Saroj Poddar, lays on the palaver when extolling on the performance results of the company. In his esteemed viewpoint, and mark the words, the results were the end product of "the right fundamental brand building activities, including insightful advertising, superior value propositions, innovative products, and stronger distribution across all product categories that the company plays in. Consequently, oral care sales grew by an astounding 57%, followed by personal grooming business growing at 22%, and portable power category by 17%." If this bombastic verbiage is really what it is all about, then Gillette would probably be ranked as the ultimate marketing company operating in the Indian geography. The company's brands are all of the 'videsi' variety, and range from Gillette, Wilkinson, 7 O'Clock, Duracell, Oral B, and Satin Care.
Given that Mr. Poddar is the Chairman of the Board, even though of the non- executive variety, he is also the de-facto holder of the bragging rights. His learned observations are nothing more than a quid pro quo for the Rs 12 m that the company shells out to him as annual compensation. (If one has a dekko at the ten year performance of Gillette, bottom-line wise, the overall picture is not very lustrous.) And for the matter of record, the Poddar family appears to have a 12.8% stake in the company, with the parent, Proctor and Gamble (P&G), having a 76% hold. Thus the total floating stock is a mere 11.2 %.
The Products that make the company
In plain English, personal care products comprise of shaving systems and cartridges, razor blades, toiletries, and shaving brushes. Together, this category represents what the company is all about in India. The Personal Care category accounted for a little over Rs 6 bn in sales (Rs 5.0 bn) out of total gross sales of Rs 8.6 bn (Rs 6.7 bn). That is to say almost 70% of all that the company could rustle up sales wise during the year, against 74% in the preceding year. Next in the pecking order is Oral Care comprising of toothbrushes and other oral care products. This division brought in sales of Rs 2.2 bn (Rs 1.4 bn) or 25% (20.5%) of all sales. Bringing up the rear end is the colorfully named but non performing Portable Power Products division, made up of battery sales, and ringing in 5% (5%) of sales in either year. There are also some minor component sales. Individually speaking, the three biggest product lines are shaving systems and cartridges, followed by tooth brushes, with safety razor blades taking the third slot. Together the three items account for over 85% (84%) of gross rupee sales.
Increased focus on outsourcing
The rupee sales increase was the end product of sharply higher volume sales of some of its major individual product lines, with toothbrush sales scoring the biggest percentage increase of 80% to 172 m brushes. Volume sales of razor blades also grew 24% to a little over a billion blades. Its biggest individual selling product, namely shaving systems and cartridges, however grew only 4.4% to 224 m pieces. (It may be pertinent to state here that 83% by volume of toothbrush sales were outsourced, as were 100% of toiletries, and shaving brushes too.) In the FMCG segment, there is increasing recourse to outsourcing end products from the small scale sector, which after the brand tagging, rakes in the moolah when flogged through the retail outlets.
It cannot take a similar call on blades, and shaving systems, as it calls for fairly complex manufacturing technology, right from the raw material input stage. As a matter of fact in the last two years the company has spent some Rs 520 m on its fixed assets. This addition has led to a massive expansion in the production capacity of shaving systems & cartridges, and safety razor blades. The capacity to manufacture shaving systems etc has grown to 686 m from 234 m, while that of razor blades has risen to 1.3 bn from 886 m. Production of the former at 230 m in FY10 was way below the capacity level, while production of blades at 951 m units was closer to the hiked up capacity. However the large expansion in capacity levels gives one an idea of the prospects that the company sees in both these lines of business.
The increasing focus on outsourcing
The company has little difficulty in selling what it makes as witnessed by excellent working capital management. It also almost sells cash down, with low inventory levels to boot. Besides, FMCG companies require the very minimum in capex spending to make it all possible, and the fixed asset to turnover ratios are considerably higher than that recorded by the basic large capex commodity players. Gillette with a gross fixed asset base of around Rs 2.7 bn could rustle up sales of Rs 8.6 bn. Given this scenario, and given the fact that it sells cash down; it is only natural that lenders of money are chasing the company, rather than the other way round. The company has zero borrowings you see, and suffers from an embarrassment of cash resources. The surplus cash is sloshed around in other group companies in the form of inter-corporate deposits, probably under instructions from its parent, P&G. But we will expand on this further on. (Inspite of the number of affiliates that it appears to have operating out of India, it does not have any investment stake in a single company).
The company has raked in the moolah at the net level alright but the contribution to margins by the outsourced items appears to be overbearing. There are also baffling inter se dealings with the parent P&G, and with Gillette, and the many associates and spinoffs, on a wide variety of revenue and capital account transactions. (It sold revenue items to seven group companies; it had loans and advances outstanding from 11 group companies, and had 33 related party disclosures with whom it had transactions during the year). It is impossible for an outsider to make any sense of it all. However from ones understanding of how the game is played out, it outsources the bulk of the toothbrushes, and 100% of toiletries and shaving brushes. It also imported in raw material form, shaving systems and cartridges worth Rs 1.1 bn. One does not know the additional direct costs that the company incurs after a product is sourced in from the supplier, but going strictly on the differential between the purchase cost per unit and the gross sales price per unit, (excise duties constitute a mere 10% of overall sales), Gillette would have raked in Rs 6.7 gross per unit sold, or a value add of Rs 1.2 bn on sales of toothbrushes alone. Similarly, on toiletries it would have made Rs 447 m, and on shaving brushes Rs 43 m, or a cumulative total of Rs 1.6 bn. That adds up to 77% of pre-tax profit of Rs 2.1 bn. Needless to add, sales too would have got a similar boost. (The company may have also made some money on the value addition that it effected to the shaving systems and cartridges that it imported.) The above profit calculation is but a rough back of the envelope exercise, but a pointer nevertheless of the opportunities in outsourcing products, and then adding value by attaching a brand tag to the product. Okay the company also spent a cool Rs 1.7 bn on trade incentives and advertising expenses altogether in FY10, in pushing all its products in the market place.
Following the dictates of the Big Boss
The manner in which multinationals are run, it is a very structured operation, and the minor entities appear to merely follow the dictates of the Big Boss (on how revenues and profits are generated). To give an example, in a year in which it added massively to the productive capacity for the manufacture of shaving systems, it outsourced via the import route, 220 m pieces of shaving systems and cartridges to the tune of Rs 1.1 bn, in the form of bulk raw materials. Further, the total value of raw material and consumables imports that it swallowed up amounted to Rs 1.5 bn. This consumption accounted for 70% of all raw materials and consumables that it used during the year. It imported the vast bulk of the raw materials from P&G International Operations Pte (probably the Singapore arm) and the balance from The Gillette Company USA. In the preceding year the vast bulk of such imports were through The Gillette Company USA and the balance from 'Others'. Besides, the entire amount of capital goods imports of Rs 280 m was sourced in from The P&G Distributing LLC (probably based out of the States), while in the preceding year the providers of such imports were The Gillette Company USA and Gillette UK Ltd. It is all supposed to be fun and games you see. There is still little emphasis on exports, and in any event there is very little that it can export, given the product profile. Needless to add the management of the Indian operations will have little say in all this, and merely follows the dictates of the Pied Piper. Then there are a host of other 'dos', where moneys exchange hands, including such seeming inanities as 'Relocation and reimbursement expenses', 'Business Process Outsourcing expenses', 'Other reimbursement of expenses', et all. It is a jungle of sorts out there.
As stated earlier the company's surplus funds are parked in safe havens within the group. At year end the company had advanced Rs 2 bn to two of its India based affiliates P&G Home Products, and Gillette Diversified Operations Pvt Ltd (and not one company as stated in the Loans and Advances schedule). It appears to have charged 6.5% interest on this outstanding. It is open to question whether the company could have earned a higher return elsewhere. It also gives a substantially higher credit line to its affiliates to pay up for sales affected to them. But, again, it may have little leeway in the matter here.
Whatever, the company appears to have achieved the desired traction in its onward journey, and if the management is allowed to maintain the right professional focus by its foreign principles, then the shareholders will have much to look forward to.
PLEASE NOTE THAT I AM NOT A SHAREHOLDER OF THIS COMPANY
This column Cool Hand Luke is written by Luke Verghese. Luke has been a business journalist, financial analyst and knowledge management head with a professional experience of more than 20 years. An avid watcher of the stock market, he has written extensively on stock market trends. His articles have featured in Business Standard, Financial Express and Fortune India amongst others. He has also been the Deputy Editor, Fortune India and the Financial Editor of The Business and Political Observer.