Gillette India: High selling costs to hurt margins

Gillette India, a subsidiary of US-based P&G, reported a mixed performance for the June quarter. The maker of grooming products saw its sales increase by around 35 per cent during the quarter on the back of the stable performance of its razor division (Gillette), and higher growth rates from oral care (Oral-B) and batteries (Duracell) businesses.

Razors & blades, which constitute more than two-thirds of revenues, grew about 25 per cent, while other businesses grew faster. A rollback of excise duty cuts from March this year could be partially responsible for the relatively slower sales growth in grooming products.

On the profitability front, the company did not have the same fortune. In the June quarter, the company’s profits dwindled by about half, compared to the same quarter last year. The main reasons were increases in raw material and inventory costs. Advertising and promotional costs also tripled on account of higher advertising in the personal care market for its existing products as well as new products.
 

ROBUST TOPLINE GROWTH
In Rs cr	Q4 FY10	Q4 FY09	FY10
Net Sales	251.5	184.0	852.5
EBITDA	33.3	61.5	225.3
Net profit	18.6	38.1	137.1
EPS (Rs)	-	-	42.1
Year ending is June                                    Source: Capitaline

Overall, operating expenses zoomed about 70 per cent, pulling down net profits as well as profit margins (net profit margins came off to 7.5 per cent, compared to 20 per cent last year). The parent company’s desire to grow faster in emerging markets could see higher investments and new product launches in Gillette India, which augurs well for the company.

The stock has slipped by Rs 100 after results were announced and is trading at 44 times its 2009-10 earnings, which is higher compared to peers. Premium valuations, which have been the case for a long time, is due to the high entry barriers (in grooming products) as well as high promoter holding of 88.7 per cent. With the long-term growth story intact, investors may consider the stock on dips.