Gillette

Investors Need To Wait Till The Stock Comes To A P/E Multiple Range Of 20-25

FMCG major Gillette India has seen a sharp surge in its stock price in recent months. In the past three months, the stock has soared by 46% on bourses. This sharp move seems to have come due to rumours that the company may announce a share-buyback programme. While the company's management has categorically denied that there is any such proposal, it has not abated the buying interest in the counter. 

   Gillette, a Procter & Gamble group company, has branded products in personal grooming and oral care segments. It also has a small presence in the portable power segment that includes batteries, torches and lamps. Strong international brands along with an equally strong parentage have helped the company fetch a premium pricing for its products. While Gillette has not been very aggressive when it comes to pushing sales, it has steadfastly worked at maintaining its operating profit margin at close to the average level of 38%. 

   However, the company's revenues and earnings have largely been stagnant over the past three years. It has rather reported a drop in profits during the past two consecutive years. On a trailing four-quarter basis, the company has shown a marginal improvement in topline QoQ, while logging an average operating profit margin of 38% over the past 12 quarters. 

   The company's stock is currently trailing at a price-to-earnings multiple of 34. It is valued at a market cap of nearly Rs 4,500 crore, more than six times its revenues of Rs 700 crore. These valuations are too high for a mid-cap multinational FMCG company. 

   Assuming the company logs a growth of 25% in net profit at the end of its fiscal year in June 2010, the stock is currently trading at a forward P/E of 31. This again is a relatively high P/E. Shortterm investors in the stock need to watch out for any signals of weakening in the price in order to book profits. New investors, tempted to buy the stock on the back of the returns generated in the past three months, need to wait till the stock is available at lower valuations, with a P/E multiple range of 20-25.