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BS Compass

Gillette's performance this year has improved dramatically

Gillette's restructuring activities in the last three years are bearing a lot of fruit, going by the company's financial performance in the nine months till September 2003.

Sales of its continuing businesses grew 23 per cent during the period, but more importantly, operating margin jumped by a mind boggling 18 per cent percentage points to 29 per cent. Coupled with a drop in interest and depreciation costs, this led to a near 300 per cent jump in profit before exceptionals and taxes.

Net sales growth stood at -6 per cent, but that's because the company sold of its 'GEEP' business in 2002 and in the March quarter of the current year it exited its 'Braun' business.

Continuing businesses grew 23 per cent, driven by a 22 per cent growth in the core blades and razors business and a 40 per cent jump in personal care products. Even the oral care business (13 per cent of revenues) posted a handsome growth of 34 per cent.

But the highlight of the results clearly is the gigantic 18 percentage point jump in operating margin. The lower contribution of the portable power business, at 9 per cent this year compared to 27 per cent last year, obviously helped.

Besides, the company rationalised some its low margin products, and improved manufacturing efficiency. With the company importing about 40 per cent of its products, it also benefited from the appreciation in the rupee.

The result of all this was that despite a 6 per cent drop in net sales, operating profit jumped 145 per cent.

The company is now debt free, which has resulted in savings on interest costs, and even the depreciation charge has declined owing to the disposal of the 'GEEP' business. Plus, there has been a significant reduction working capital.

In summary, everything seems to have fallen in place for Gillette, and it's no coincidence that this year's net profit (in just the first three quarters of the fiscal) is the highest for the company since the start of its operations.

The improvement in performance has been amply rewarded by the markets - the stock has almost doubled to the Rs 600 levels. And at the current levels, it trades at well above 30 times 2003 earnings, which is considerably higher than peers.

The Gillette stock, however, has always enjoyed a premium thanks not only to all its brands, but also because of its technological edge in its core businesses.

Arvind Mills

Arvind Mills' biggest USP for investors, compared with the other textile companies "" the low price of cotton that the company had locked into "" has been eroded lately.

In an environment of rising denim prices last year, it had resulted in higher margins. However, with a bad cotton crop this year, cotton prices have increased around 15-20 per cent compared to the corresponding period last year.

Maintaining margins, therefore, will be dependent on the passing on the increase in raw material costs to denim consumers. But denim volumes also declined around 6.7 per cent over the same period last year, whereas realisations were stagnant.

As a result, operating margins fell 500 basis points over the same quarter last year to 23 per cent. Along with a low topline growth of 3.6 per cent in the quarter, it resulted in a 16.5 per cent fall in net profits.

The main reason why profits didn't fall further was the 20 per cent decline in interest costs, which will reduce further in the second half of the current year, since Arvind Mills has prepaid Rs 117 crore of debt.

To counter the downsides, Arvind is focusing on garments to drive margins in future. Its shirts unit has commenced trial production and with a doubling of capacity in the current quarter, it should start contributing to revenues in the fourth quarter. But these are uncertain times for the denim major.

Orders for the summer next year to be placed in the next few weeks, which will decide the price outlook for denim. Further, the other deciding factor for Arvind's margins will be the average price at which it is able to accumulate cotton inventories for next year.

Until then, the main news flow driving the stock price will be on account of a refinancing of debt under the Textile Reconstruction Fund, which will lead to a decline in interest rates.

With contributions from Mobis Philipose and Sameer Ranade