Gillette: Core growth

Grooming division is what will drive growth at Gillette

Gillette India is on a roll. On the back of an exceptional performance in CY2003, it has reported a 77 per cent jump in profit (before exceptionals and taxes) in the first quarter of the current calendar year.

Sales of continuing businesses grew 23 per cent, again led by the core business of blades, razors and toiletries. This division grew sales by 20.3 per cent, thanks to the success of 'Vector Plus' (launched last year) and increased sales of Mach3. The company has cut down its advertising back to the normal level of around 7 per cent of sales, after the ad blitz for the 'Vector Plus' launch in the December quarter.

Thus, profitability has also normalised after falling to a unusually low 5.1 per cent in the December quarter.

In fact, operating margin jumped over 900 basis points year-on-year to 31.6 per cent thanks to a better product portfolio, a reduction in import duty and the appreciation in the rupee in the March quarter, which is of significance because Gillette imports over 65 per cent of the raw materials and consumables needed.

Importantly, the company's two other divisions, portable power and oral care, also reported a healthy growth in sales and profit after all the restructuring that has been happening over the past couple of years. Put together, sales of the two divisions rose 17 per cent, while segment profit jumped over 20 times.

Nevertheless, it's the grooming division that will drive profit growth. The company's core competency is in shaving systems, which still accounts for just 3 per cent of the entire shaving market, which is dominated by the lower-end, double edge segment.

Given the low share, there is obviously enormous potential for growth. With consumers expected to upgrade from disposables to shaving systems, profitability can be expected to be on an upswing.

The March quarter results were taken well by the markets - the Gillette stock has risen almost 16 per cent since the results were announced, especially since the markets have been lacklustre in the same period.

It now trades at over 30 times estimated CY04 earnings, which is the sort of premium rating the company has always enjoyed because of its leadership and technological superiority.

Century Textiles

Century Textiles' earnings for the March quarter are a mixed bag "" although net profit has surged 145 per cent to Rs 44.62 crore, it has been aided by a 85 per cent jump in other income (the company had sold a surplus ship) for Rs 42.20 crore. Also, the performance of the company's various divisions has not been uniform.

While the cement and writing and printing paper divisions improved their profitability, there was a marked decline in the profitability of the key textile division.

Overall operating profit grew 12 per cent to Rs 64.65 crore in the March quarter and operating profit margins grew 27 basis points to 10.14 per cent.

The company's cement division has benefited from an upturn in the industry""- production has grown, but more importantly price realisations surged by around 15-17 per cent year-on-year.

An analyst with a domestic brokerage firm said, "The cement sector witnessed an upturn only in Q1 CY04, as certain key consuming areas had a slightly longer monsoon, thereby delaying the surge in construction usually witnessed at the end of the rainy season."

As a result, segment profitability of the division has surged 463 per cent to Rs 26.62 crore in March quarter '04 and segment profit margins surged 747 basis points to 9.33 per cent.

An upturn in the economy has helped its writing and printing paper division too "" as consumers have shown signs of upgrading their stationery purchases.

As a result, segment profitability of the division has grown 9 per cent to Rs 12.26 crore in the March quarter '04 and operating profit margins grew marginally to 12.74 per cent.

However, in the key textile division, the performance was affected by rising input costs ""- the international price of cotton in Q1 CY04 has grown approximately 18-20 per cent to 70 cents a pound. As a result, profitability dropped 236 per cent to Rs 5.4 crore.

The division is, however, expected to improve its performance as the company is planning to import latest machines from Europe. The move should offset the rising cost of key raw materials through greater economies of scale, as well as assist the company scale up the value chain.

Further, with cement majors planning a price hike once the elections are over, the division is expected to better its profitability.

With contributions from Mobis Philipose, Amriteshwar Mathur