Gillette India: What next?

While experts don't expect P&G to delist Indian subsidiary, an OFS could put pressure on the stock

Since the Securities Appellate Tribunal (SAT) has rejected the appeal of US-based Procter & Gamble (P&G) with respect to its proposal to meet public shareholding norms in Gillette India, the next natural step for the company would be to come out with an offer for sale (OFS). P&G had earlier proposed to Securities and Exchange Board of India (Sebi)  that part of the holdings of the India-based co-promoter, S K Poddar Group (which holds 12.9 per cent), in Gillette India be considered as public holding to meet the minimum 25 per cent public holding guidelines. The proposal also included an inter se transfer between P&G and Poddars at a premium to market price, which P&G would acquire and later offload in the market, eventually leading to an increase in public holding in Gillette to 25 per cent. However, the proposal was rejected by Sebi and later by SAT.

While P&G has an option of further appeal, more probable options are delisting or to come out with an OFS. While a delisting will require it to come out with an offer that is attractive enough for minority shareholders (11.24 per cent stake) to subscribe (most likely at a good premium to current price), the OFS option could put pressure on the stock in the interim.

In the case of the latter, there is a likelihood of the offer being priced at a discount to the current price at Rs 2,250 a share, as has been the case with OFS by other companies. Also, the valuations are not cheap. Though Gillette’s stock has typically quoted at a premium to the FMCG sector, its current PE is 86 with the average five-year PE being 57. However, some experts are of a different view, given the share price has already corrected and, hence, there is less scope for a huge discount. Gillette’s stock is down about 10 per cent from its January 2013 highs of Rs 2,550 levels to Rs 2,241 currently.

"I do not think they will have to offer a huge discount, even at marginal discount its OFS could go through without much hindrance as a result of liquidity," said Gaurav Dua - head of research at Sharekhan. To meet the public holding norms, the promoters will have to offer about 44.83 lakh shares, which will be worth Rs 1,005 crore at current market price. In terms of offer size, too, this seems manageable considering there is demand from the institutions for large quantities of good companies like Gillette.

Besides, such a move will only improve liquidity making the counter attractive for institutions and traders. Since the public float is 11.24 per cent, Gillette's counter witnesses daily trading volumes of around 500-1,000 shares. Improved liquidity could also lead to the stock getting included in some of the indices and thus see more interests in the longer run.

Delisting—an option
Since the company had made an appeal to consider its Indian promoters, the Poddar Group, as part of public, market participants say that both the promoters do not seem to be wanting to sell or reduce their stake in Gillette. Hence, one section of the market believes that the promoters might opt to delist the company. “One cannot rule out the delisting option. And today the (foreign) promoters have the advantage because of the depreciation in the rupee, which is (down) almost 35 per cent in last two years. If they can pay this 35 per cent currency advantage in terms of higher prices for delisting, there is possibility to generate demand,” says G Chokkalingam, executive director & CIO at Centrum Wealth Management. To acquire the public holding, even at a 35 per cent premium to current price, P&G will have to shell out Rs 1,100 crore only.

Some others believe such a move may not yield results, given Gillette’s long-term prospects. Among the key products sold by the company are Gillette-branded shaving systems and accessories, Duracell batteries and Oral-B oral-care products. In the last four years (starting 12 months June 2008 to June 2012), the company’s revenues have grown at a compounded annual rate (CAGR) of 20.2 per cent. While profits dipped in FY2011 and FY2012, it was largely due to a sharp jump in selling expenses. The first nine months of FY2013 have not been good, with revenues down 15 per cent and net profit down 6.7 per cent to Rs 1,043 crore and Rs 70.7 crore, respectively, and experts like Phani Shekhar, fund manager, at Angel Broking, feel that in the near term the company can feel the heat on margins because of rupee depreciation.

However, most experts say there is little reason to worry as the company’s long-term prospects remain encouraging.

Chokkhalingam G says that the Gillette should not feel the heat of the economic slowdown because of its product range (related to shaving). Gillette’s long-term prospects remain good, given the low penetration.

Nikhil Vora, managing director, IDFC Securities, says, “Shaving and male grooming is a huge space in India. Gillette dominates globally but I do believe they have under-delivered in India”.

Against this backdrop, while long-term investors could stay put, pressure on the stock in the event of an OFS could also be used to accumulate.