Stock Review: Gillette India

FISCAL 2010 proved to be a year of robust growth for Gillette India. After two years of declining profit growth, the FMCG major reported a growth of 21.2% in its net profit. The impressive growth in the year ended June 2010 is largely due to the buoyancy in its shaving products' business.

   However, the poor show of its other two divisions including portable power and oral care impacted overall profitability. In the near term, the challenge will be to improve the performance of these two segments, which comprise nearly one-third of its revenue.

   During the June quarter, its net profit halved to Rs 19 crore from the year ago level. This was despite a strong 37% jump in net sales to Rs 252 crore, the best growth in any of the quarters in the past three years. The company has attributed the sharp fall in its bottomline to the significant rise in the marketing costs for its razor segment.

   Higher operating costs impacted Gillette's profitability. For instance, in the June quarter, costs under the heads of raw material and advertising and promotion ate into nearly half of its revenue. A year ago, they had formed just one-fourth of its revenue. As a result, the company's operating margin before depreciation contracted sharply from 29% a year ago to just over 12% in the June quarter.

   The lackluster performance of its other divisions including oral care and durable power demands immediate attention. The share of both the divisions in revenue increased to 30% during the June quarter from 18% a year ago. However, the company reported operating losses in both the segments.

   Investors may take solace from the fact that the company has gradually reduced the extent of its capital employed on these two divisions. The capital employed on its shaving products segment on the other hand has increased. This reflects the company's improving focus on its more profitable business.

   Gillette's stock price has more than doubled in the past one year as compared to the 20% gain in the benchmark Sensex. Strong international brands along with an equally strong parentage have helped the company fetch a premium pricing for its products. Another reason for the strong run-up in the stock could be the expectation of a share buy-back offer from the company. The promoter holding in the company is a little over 88%

   At Wednesday's close of 1,948, the stock's trailing 12-month P/E is 46.3. Though the revenue growth has been quite impressive in the past four quarters, Gillette's ability to convert this into a proportionate growth in earnings remains inconsistent. Given this, its current valuation seems to be on a higher side.