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23 Mar 2011
Gillette India

Gillette India buy @ 1570

Gillette India’s share price has taken a 22% correction since its recent highs of Rs 2000. At cmp of Rs 1570 the stock looks quite expensive at almost 40 times its annualized half earnings for 6 months ended Dec 10. A closer look at the results however reveals a different picture. Top line for quarter ended 31st Dec 10 quarter has grown by a healthy 28% yoy.  Raw material & employees cost are marginally higher at 46% of sales against 44% for the year ended Mar 10. It is the advertisement expenditure at Rs 76 Cr which has played the spoil sport. But this seems to be a conscious strategy on part of the management to push volume growth. This strategy seems to have worked well as the company has recorded a top line growth in excess of 25% over past few quarters which is among the highest in the fast moving consumer goods industry.  Advertisement expenditure for Gillette India for past five years has been averaging at 18% of its revenue. For sake of analysis if one were to treat the  advertisement expenditure in excess of the 18% of revenue  incurred during the Dec  quarter as an one time investment , annualized eps based on first half numbers  works out to be Rs 52 per share which yields a price earnings multiple of 30 times.

How does Gillette compare with its peers in the FMCG industry?

For the purpose of comparison let us benchmark Gillette‘s performance against nestle over a two year period. Revenue growth for Nestle at 45 % has been at par with Gillette‘s 46 %, operating profit for nestle has grown at a much faster pace at 64 % as compared to 46 % for Gillette. Operating margins for Gillette at 26% though are higher than 20 % for nestle.

 For the quarter ending 31st dec 2010 Gillette revenue growth at 28% yoy has been far superior to 18 % for Nestle. Annualized eps of 52 (adjusted for one time advt. expense) for Gillette however is being discounted 30 times against over 40 for Nestle.   We also need to focus on Gillette’s marketing strategy. Advertisement expenditure for Gillette at 18 % of revenue is significantly higher than its peers in the FMCG industry. Comparative figures range from 5 % in case of nestle to around 12- 13 % for HUL and Colgate. If one were to treat part of this expenditure as investment for robust future growth, Gillette stock price at Rs 1570 makes it an attractive buy considering its near monopoly status in the men’s grooming segment in one of the largest markets in the world.  

So is the current PE of 30 for Gillette expensive?     Based on the estimated earnings for the year ending 31st mar 2011 the Sensex shares are trading at 18 times earnings. FMCG stocks have traditionally traded at a premium to the market multiple. For Gillette the average PE multiple for 5 years has been over 30. Considering the robust revenue/profit growth reported by the co over past couple of quarters and the bright future for its core business fresh exposure at CMP of Rs 1570 can be considered.