Gillette: Well groomed

Gillette's operating profit increased by a stunning 153% in the Dec quarter

Driven by a strong fourth quarter in which sales grew 18 per cent, Gillette managed to post reasonably good numbers for CY05 at Rs 453 crore, a top line growth of 11.4 per cent. Compared with the first two quarters of 2005 when profits had dipped, the numbers have improved in the second half.

The grooming business, in particular, did well posting a 14 per cent growth in the December quarter, as did oral care. Sales of Mach 3, the high-value shaving product, grew by 22 per cent in CY2005, while Vector Plus, the mid-segment product developed for India, grew by 72 per cent. However, the batteries business declined by 25 per cent.

Gillette's operating profit increased by a stunning 153 per cent in the December quarter, propping up operating profit growth for the full year to 12.6 per cent at Rs 106.98 crore.

A reduction in advertising and promotion costs last quarter to 18.8 per cent of sales, a fall of 340 basis points y-o-y, helped boost margins as did a big drop in the other expenditure of nearly 600 basis points.

The operating profit margin for the quarter expanded 1000 basis points but this was not enough to push up margins for the full year which remained flat at 23.6 per cent.

After the worldwide merger of Gillette with Procter & Gamble, the parent has decided to keep the two companies separate in India. But Gillette India announced a restructuring plan in January, saying it would leverage synergies arising from the global merger to increase growth and deepen penetration.

In other words, Gillette will use the P&G distribution channel, which is more efficient. Last week, Gillette announced that it would be writing off about Rs 90 crore as the cost of restructuring, which amounts to 28 per cent of its net worth in CY2004.

While this will be a burden for the first two quarters of 2006, the company expects long-term savings and benefits from the arrangement to be substantially higher.

The company should continue to do well operationally. However, owing to the restructuring, the balance sheet is likely to be strained. At its current price of Rs 942, the stock appears expensive at a trailing P/E of 44.6.

Vesuvius: Steely approach

The key highlight of Vesuvius India's December 2005 quarter results was its ability to manage input costs, at a time when key customers for its refractories, mainly the steel industry, have been grappling with a difficult operating environment.

The company has reported a decline of 320 basis points y-o-y to 19.84 per cent in its operating profit margin in the December 2005 quarter though operating profit expanded 8.26 per cent to Rs 13.1 crore. In contrast, in the first nine months of CY05, the company saw its operating profit margin dip merely 26 basis points y-o-y to 21.95 per cent.

Weaker performance in the December quarter was largely owing to 301 basis points y-o-y jump of its raw material costs as a percentage of net sales to 40.15 per cent. Higher raw material costs in the last quarter was largely owing to higher costs of graphite and alumina.

To the company's credit, it has attempted to minimise pressure on margins, by focusing on supplying refractories on a solution selling route rather than per piece basis. As a result, the company's net sales expanded 25.71 per cent y-o-y to Rs 66 crore in the December 2005 quarter.

Nevertheless, the stock has underperformed the CNX Mid-Cap index over the past three months "" the stock has declined about 5.1 per cent compared with 16 per cent rise in the broader market.

Analysts say with user industries such as steel showing signs of revival in the last few weeks, it could help the company pass on higher input costs. Since the company is a low-cost producer of refractories, the decrease in customs duty by 2.5 per cent to 10 per cent is unlikely to affect Vesuvius.

Also, the company is planning to double its capacity in the medium term. At the end of 2004, the company's refractories (shaped) capacity amounted to 419,600 pieces, while that of refractories (unshaped) was 18,000 tonne. However, the stock, trading at almost 17 times trailing earnings, does appear on the higher side.

With contributions from Shobhana Subramanian and Amriteshwar Mathur