8 November 2014 Initial Coverage Higher demand for the male grooming product to boost company s outlook. Rating: Buy Equity research FMCG Coverage initiation Recommendation Buy Target price (INR) 3,319 CMP (INR) 3,001 Stop Loss(INR) 2,820 Duration Market data 3 months Market cap. (`bn) 97.8 Beta 0.3 52 week H/L (`) 3,025/1,850 All time High (`) 3,025 Decline from 52WH (%) 0.8 Rise from 52WL (%) 62.2 Share price performance Source: NSE Shareholding Pattern (%) Promoters 75.00% FII 8.07% DII 0.74% Others 16.19% * As of Sep. 2014 Abhishek Das abhishek.das@muthootsecurities.com Investment Rationale Potential of growth in Indian men grooming market The blades and razor market in India is estimated at around `20,000 mn. The market is growing at around 7-8% annually. Gillette is the market leader in razors and blades market. Its market share has been growing consistently over the last few years. Further, the potential is large in Indian markets as Indian men on an average shave only 2.5 times a week, far lower than, say, Koreans and Japanese. In addition, recent study by Indian industry body ASSOCHAM (Association of Chambers of Commerce) states that Indian men spend approximately USD 100 more than women in personal care products. The demand for the male grooming product is more in top-tier cities such as Mumbai, Bangalore and New Delhi, as well as second rung areas with a highly style-conscious population like Chandigarh and Goa. Gillette India, a dominant player in India men Grooming Industry is well position to report growth over and above the industry average supported by brand building and innovative and premium category products. Changes in consumer behaviour to drive growth Indian men are finally coming out of the closet when it comes to having a daily grooming regime. They are no longer shy of using creams, lotions, face scrubs, shower gels and so on meant for male skin. Grooming is no longer a quick shave, slapping on some aftershave and heading out of the door in India. To further strengthen its competitiveness, Gillette India continues to focus towards new product launches and is planning to launch after shave skin care gel in near future to cater to the new demands of Indian men. Gillette also remains committed to launch few other products in the years ahead. Jun 13A Jun 14A Jun 15E Jun 16E Net Sales (`bn) 14.4 17.5 20.6 23.7 Net Profit (`bn) 0.9 0.5 0.6 0.8 Share Capital (`bn) 0.3 0.3 0.3 0.3 EPS (`) 26.7 15.8 19.2 23.8 PE (x) 112.2 190.2 156.3 125.9 P/BV (x) 15.1 15.2 15.1 14.0 ROCE (%) 21.0 12.5 15.1 17.4 ROE (%) 13.4 8.0 9.6 11.1 11 h September 2014 1
Gillette India Ltd., offers personal grooming, oral care, and portable power products in India and internationally Company snapshot Gillette India Ltd (GIL) formerly Indian Shaving Products Ltd, was incorporated in 1984 and is headquartered in Mumbai, India. Gillette India Ltd is a subsidiary of Procter & Gamble India Holdings B.V. It commenced operations in 1985. The company s manufacturing facilities are located at Bhiwadi in Rajasthan and Baddi in Himachal Pradesh. GIL is engaged in manufacturing and selling of branded packaged fast moving consumer goods in the grooming, portable power and oral care business. Gillette India maintains leadership position in blades and razors segment with a value share of 27% in 2013. The company continued to enjoy long-established presence and countrywide distribution. In addition, the availability of Gillette s brands at every price point made it popular amongst consumers of all income groups. GIL also has a small presence into ladies personal care segment (Gillette Sensor Excel for women). In the oral care segment, the company provides toothbrushes under the brand Oral-B. Oral-B Vision and Oral-B Shiny Clean are among some of the prominent toothbrush brands offered by the company. GIL also provides alkaline batteries in the portable power segment under the brand Duracell. GIL has a manufacturing facility located at Bhiwadi in Rajasthan and has two packing units in Rishikesh (Uttaranchal) & Baddi (Himachal Pradesh). Further the Blades & Razors market size is estimated at over `20,000 mn. The strong portfolio and brand name enables GIL to deliver another year of robust double digit growth during the year ended June 2014. In addition, there is significant opportunity to grow penetration, trial and consumption. The Indian economy presents significant opportunity with a growing population, category whitespace and rising incomes. However, high inflation, supply bottlenecks and intense competition present significant near term challenges. Robust sales growth during June 2014 quarter GIL has reported a sturdy 21% YoY growth in its net sales to `4,797.2 mn for the fourth quarter ended June 2014, as compared to `3,929.6 mn in the same period of previous fiscal driven by robust sales growth across the segments. Sales from the grooming portfolios for the quarter ended June 2014 grew by 18.0% YoY to `3,316.8 mn. Moreover, the sales from oral care segment grew sharply by 35.8% YoY to `1,244.1 mn as against `916.1 mn in the corresponding quarter previous fiscal. In addition, the sales of Portable power segment grew by 16.7% to `236.3 mn. Despite the robust performance at sales front, the net profit grew merely by 1.8% YoY to `167.6 mn as against `164.7 mn for the same period of previous fiscal as higher operating expenses offset the impact of higher sales. The operating expenses for the quarter under review grew sharply by 24.8% YoY to `4,528.0 mn as against `3,628.6 mn. Quarterly performance trend (` in mn) 11 h September 2014 2
GIL s shaving products business is in fine shape, both on sales and profitability front sequentially. The batteries business has seen stable sales while incur loss during the quarter. However, the sales of oral care business grew by 13.1% sequentially, but are making losses due to marketing spends. Sequential (quarter) performance reveal strong story ahead Net sales of the company grew by 5.3% sequentially. GIL s shaving products business is in fine shape, both on sales and profitability sequentially. However, the batteries business has seen stable sales while incur loss during the quarter. The sales of oral care business grew by 13.1% sequentially, but are making losses due to marketing spends. As long as this continues, overall losses may still be visible but there could be a turning point, when the oral care business becomes big enough to fund marketing spends without eating into the profits of its other segments as much. While on the positive side, the company managed to report 53.4% growth in its operating profit as cost of raw material consumed decline sharply by 40%. However, a weak rupee considered to be a prime cause for underperformance of the company, as Gillette imports nearly half of its raw material requirement by value terms. Earlier the company spends heavily on advertisements but during June 2014 quarter, the advertisement expenditure declined by 10.7% sequentially. The main idea behind higher advertisement expenditure in the earlier quarters is to support the launch of its relatively new toothpaste brand Oral-B Pro Health. As a result, net profit grew sharply by 97.6% sequentially to `167.6 mn. Further, Gillette s margins have shown a slight improvement during June 2014 quarter on sequentially basis. During Q4CY14, EBITDA and PAT margins improved sharply by 175.8 bps and 163.2 bps sequentially to 5.6% and 3.5% respectively. During the last few years, Gillette India spends lot of amount on advertisement to boost sales especially in the oral-care segment. Keeping in mind the company s efforts to turnaround its oral care business, we expect GIL will manage to generate operating profit from the oral care segment in the company quarters. Strong product portfolio Personal Grooming Business to report good numbers, going ahead Gillette Personal Grooming portfolio registered a growth of around 35% YoY to `3,316.8 mn for the full year ended June 2014 supported by growth in its sales volume across regions in India. Further to strengthen its product portfolio, the Company successfully launched New Gillette Vector-3 in the Mid-Tier Blades & Razor segment. The new razor comes with 3-self adjusting blades (one of its kind technology), advanced lubra-strip, easy to rinse blades and non-slip rubber grip, thus, providing consumers with a superior shaving experience. The company s premium products registered strong performance with both Mach3 and Fusion, delivering double digit growth behind strong razor placement, Go-to-Market plans and innovative New Gillette Shaving Cream. These new products further strengthen Company s position versus competition in the pre-shave category, while the company continued to hold leadership position in the Gel and Foam segment, respectively. Thus, we believe Company s recent launches to show tremendous growth in the coming years supported by changes in male grooming Industry. 11 h September 2014 3
Change in gender behaviour leads to growth in Indian grooming Industry Relative Price Chart Gillette India Ltd. Indian men are now more aware than ever about the impact of pollution, regular shaving, and the sun on their skin and hair. So products such as shaving creams, aftershaves, moisturizers, face masks and hair care and hairstyling solutions are increasingly popular choices with them. An ASSOCHAM recent study shows more and more men are looking for separate sets of bathing and essential care products that include bath and shower gels, face wash, and deodorants. The same study by ASSOCHAM also reveals that on an average Indian man spend approximately USD 100 more than women in personal care products. The demand for the male grooming product is more in top-tier cities such as Mumbai, Bangalore and New Delhi, as well as second rung areas with a highly style-conscious population like Chandigarh and Goa. Moreover, some media reports suggest that the blades and the razor market in India is estimated at around `20,000 mn. The market is growing at around 7-8% annually. Gillette is the market leader in razors and blades and holds 27% market share in 2013. Its market share has been growing consistently. A significant percentage of this market comprises consumers who get their shaves done at salons. The potential is large as Indian men on an average shave only 2.5 times a week, far lower than, say, Koreans and Japanese. Figure 1: Peer analysis GIL Emami Godrej Consumer CMP (`) 3,001.0 794.0 930.0 M.Cap (`bn) 97.8 180.2 316.5 EPS (FY14) 15.8 17.7 22.3 BVPS (FY14)( `) 197.4 41.1 110.9 EBITDA Margin (%) 4.7 24.3 15.1 PAT Margin (%) 2.9 21.4 9.9 Figure 2: Balance Sheet (Standalone) (`million) Jun 12A Jun 13A Jun 14A Jun 15E Jun 16E Share Capital 325.9 325.9 325.9 325.9 325.9 Reserve and surplus 5,866.7 6,166.4 6,108.7 6,162.3 6,652.9 Net Worth 6,192.6 6,492.3 6,434.6 6,488.2 6,978.8 Provisions 607.7 943.7 1,006.0 1,206.8 1,447.6 Deferred tax liability (net) 63.7 64.0 23.5 23.5 23.5 Other liabilities 3,569.7 2,890.3 3,076.5 3,681.4 4,387.3 Total Equity & Liability 10,433.7 10,390.3 10,540.6 11,399.9 12,837.2 Fixed assets 1,893.8 1,999.9 2,334.7 2,708.3 3,087.4 Loans & advances 4,413.7 3,197.9 3,213.7 3,631.2 4,045.9 Cash 1,167.1 1,668.2 1,696.1 1,273.3 1,484.9 Other Assets 2,959.1 3,524.3 3,296.1 3,787.1 4,218.9 Total Assets 10,433.7 10,390.3 10,540.6 11,399.9 12,837.2 Source: Company data; GIL; In-house research 11 h September 2014 4
Figure 3: Profit & Loss Account (Standalone) (`million) Jun 12A Jun 13A Jun 14A Jun 15E Jun 16E Total operating income 12,329.0 14,377.2 17,497.9 20,647.5 23,744.7 Operating expense 11,257.4 13,046.8 16,674.1 19,615.1 22,438.7 EBITDA 1,071.6 1,330.4 823.8 1,032.4 1,306.0 Other income 337.1 365.5 316.2 316.2 316.2 Depreciation 238.9 313.2 329.8 362.8 399.1 EBIT 1,169.8 1,382.7 810.2 985.8 1,223.1 Interest 0.1 0.2 3.6 3.8 4.0 PBT 1,169.7 1,382.5 806.6 982.0 1,219.1 Tax 412.4 510.9 292.4 356.5 442.5 Net Profit 757.3 871.6 514.2 625.5 776.6 Source: Company data; GIL; In-house research Figure 4: Ratio Analysis (Standalone) Jun 12A Jun 13A Jun 14A Jun 15E Jun 16E EBITDA Margin (%) 8.7 9.3 4.7 5.0 5.5 EBIT Margin (%) 9.5 9.6 4.6 4.8 5.2 NPM (%) 6.1 6.1 2.9 3.0 3.3 ROCE (%) 18.7 21.0 12.5 15.1 17.4 ROE (%) 12.2 13.4 8.0 9.6 11.1 EPS (`) 23.2 26.7 15.8 19.2 23.8 P/E (x) 129.1 112.2 190.2 156.3 125.9 BVPS(`) 190.0 199.2 197.4 199.1 214.1 P/BVPS (x) 15.8 15.1 15.2 15.1 14.0 EV/Sales (x) 7.8 6.7 5.5 4.7 4.1 EV/EBITDA (x) 90.2 72.3 116.7 93.5 73.8 Source: Company data; GIL; In-house research Valuation and view The Blades & Razor sector is a big category and represents a sizable growth opportunity for the Company. The Blades & Razors market size is estimated at over `20,000 mn. The strong product portfolio helped Gillette to deliver robust growth historically. With the addition of new and innovative products, the company further strengthen its competitiveness and will able to achieve strong performance, going ahead. Further, the company s entry into the toothpaste market is delivering results in line with expectations but will require significant investment. At a current market price (CMP) of `3,001, the stock trades at a P/B of 15.1x FY15E and 14.0x FY16E. We recommend BUY with a target price of `3,319.2, which implies potential upside of ~10.6% to the CMP from medium term perspective. 11 h September 2014 5
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