1QFY18 Result Update Institutional Equities Gillette India 14 November 2017 Reuters: GILE.NS; Bloomberg: GILL IN Robust Growth In Operating Margin Gillette India s or GIL s overall top-line performance in 1QFY18 was in line with our expectation, but surprised us in respect of category-wise growth. Operating margin delivery was fairly robust. Operating profit grew 32% and beat our estimate by 22%. Net income of Rs643mn was in line with expectation. Grooming yet to pick up momentum across channels: GIL reported comparable sales growth of 10% which was in line with our expectation. 1% comparable growth in grooming category was below expectation, impacted because of a highly competitive environment. Lower-than-expected restocking and increase in sales promotion could have hampered growth in grooming category to some extent. Growth was largely led by oral care segment which reported 35% growth on account of improved in-store execution and partially because of a favourable base. Margin delivery is top notch: The focus of the company on cost optimisation was clearly evident from the growth in operating profit during the quarter. This was also supported by availability of input tax credit and change in accounting treatment under the Goods and Services Tax or GST regime. Although comparable data is not available, our calculations indicate that both the categories witnessed margin expansion compared to the same quarter last year. EBIT margin during the quarter for grooming and oral care segments stood at 26% and 17%, respectively. Savings in staff costs and advertisement expenditure were partially offset by 30% increase in other overheads. Operating margin for the quarter stood at 26%, thereby showing 640bps expansion YoY. Growth in net profit of 17% was lower than operating profit because of lower other income and increased effective tax rate. Valuation and outlook: Considering the fact that the premiumisation trend is fairly strong and GIL will maintain high focus on cost optimisation, GIL, undoubtedly, will be the key beneficiary in our opinion and hence the stock will continue to trade at the multiple considered by us. Also, the reduction in GST rate from 28% to 18% on shaving preparations, razors and blades - which account for around 75% of the portfolio - will lead to volume-led profitable growth going forward. We believe that it will take a quarter or two for grooming segment s growth to get back on track, but the long-term growth story in the underpenetrated segment is intact. Hence, we have retained Buy rating on GIL, keeping our estimates, target price and earnings multiple unchanged. BUY Sector: FMCG CMP: Rs5,861 Target Price: Rs7,000 Upside: 19% Vijay Chugh Research Analyst vijay.chugh@nirmalbang.com +91-22-3926 8064 Abhishek Navalgund Research Associate abhishek.navalgund@nirmalbang.com +91-22-3926 8013 Key Data Current Shares O/S (mn) 32.6 Mkt Cap (Rsbn/US$bn) 190.3/2.9 52 Wk H / L (Rs) 6,168/3,896 Daily Vol. (3M NSE Avg.) 4,267 Price Performance (%) 1 M 6 M 1 Yr Gillette India 0.7 21.6 43.0 Nifty Index 0.6 8.8 23.2 Source: Bloomberg Y/E (Rsmn) 1QFY17 4QFY17 1QFY18 YoY (%) QoQ (%) FY16 FY17 YoY (%) Net sales 4,117 4,076 4,080 (0.9) 0.1 17,552 17,336 (1.2) COGS 1,994 1,801 1,660 (16.7) (7.8) 8,542 7,860 (8.0) COGS % of sales 48.4 44.2 40.7 (770bps) (350bps) 48.7 45.3 (330bps) Gross margin % 51.6 55.8 59.3 770bps 350bps 51.3 54.7 330bps Employee costs 291 191 279 (4.0) 45.9 1,068 1,097 2.7 % of sales 7.1 4.7 6.8 (20bps) 210bps 6.1 6.3 20bps Advertising costs 548 725 459 (16.3) (36.8) 2,387 2,304 (3.5) % of sales 13.3 17.8 11.2 (210bps) (660bps) 13.6 13.3 (30bps) Other expenses 481 686 624 29.7 (9.2) 2,504 2,259 (9.8) % of sales 11.7 16.8 15.3 360bps (160bps) 14.3 13.0 (120bps) EBITDA 804 672 1,059 31.7 57.5 3,051 3,816 25.1 EBITDA margin % 19.5 16.5 26.0 640bps 950bps 17.4 22.0 460bps Depreciation 75 135 92 21.8 (32.1) 303 384 26.7 EBIT 729 537 967 32.7 80.1 2,748 3,432 24.9 EBIT margin % 17.7 13.2 23.7 600bps 1,050bps 15.7 19.8 410bps Interest expense 11 27 11 2.8 (58.6) 53 67 27.2 Other income 89 49 11 (87.4) (77.1) 358 378 5.8 Exceptional items - - - - - - - - PBT 807 559 967 19.9 72.9 3,052 3,743 22.6 Tax 259 183 324 25.3 77.4 1,062 1,212 14.2 Effective tax rate % 32 33 33 140bps 80bps 35 32 (240bps) PAT 548 377 643 17.3 70.8 1,991* 2,531* 27.1 *Profit from continuing operations
Exhibit 1: Financial summary Net sales 17,552 17,336 18,744 20,936 23,683 YoY growth (%) (11.1) (1.2) 7.2 13.1 13.1 EBITDA 3,051 3,816 4,373 5,033 6,004 EBITDA margin (%) 17.4 22.0 23.3 24.0 25.3 Reported PAT 2,123 2,531 3,023 3,475 4,233 EPS 65.1 77.7 92.8 106.6 129.9 YoY change (%) 34.3 19.2 19.4 15.0 21.8 RoCE (%) 32.7 47.8 70.7 66.3 65.1 RoE (%) 25.3 35.2 53.9 50.3 50.1 P/E (x) 68.1 65.8 63.2 55.0 45.1 P/B (x) 15.4 33.3 30.7 25.1 20.5 EV/EBITDA (x) 45.7 43.3 43.2 36.9 30.9 Exhibit 2: Our estimates versus actual performance Y/E (Rsmn) 1QFY17 4QFY18 1QFY18 YoY (%) QoQ (%) NBIE estimate Variation (%) Net sales 4,117 4,076 4,080 (0.9) 0.1 4,318 (5.5) EBITDA 804 672 1,059 31.7 57.5 868 22.0 EBITDA (%) 19.5 16.5 26.0 640bps 950bps 20.1 590bps PAT 548 377 643 17.3 70.8 627 2.7 Exhibit 3: Change in our estimates Y/E June Old estimates New estimates Change (%) (Rsmn) FY18E FY19E FY20E FY18E FY19E FY20E FY18E FY19E FY20E Net sales 18,744 20,936 23,683 18,744 20,936 23,683 - - - EBITDA 4,373 5,033 6,004 4,373 5,033 6,004 - - - EBITDA (%) 23.3 24.0 25.3 23.3 24.0 25.3 - - - PAT 3,023 3,475 4,233 3,023 3,475 4,233 - - - 2 Gillette India
Nov-12 Feb-13 May-13 Aug-13 Nov-13 Feb-14 May-14 Aug-14 Nov-14 Feb-15 May-15 Aug-15 Nov-15 Feb-16 May-16 Aug-16 Nov-16 Feb-17 May-17 Aug-17 Nov-17 Institutional Equities Exhibit 4: Top-line growth trend Exhibit 5: Operating margin profile 6,000 5,000 4,000 3,000 2,000 1,000-15.9 6.7-0.9-11.7-11.3-14.7 4QFY16 1QFY17 2QFY17 3QFY17 4QFY17 1QFY18 20.0 15.0 10.0 5.0 0.0-5.0-10.0-15.0-20.0 1,800 1,600 1,400 1,200 1,000 800 600 400 200-30.4 26.0 19.5 19.1 16.5 15.1 4QFY16 1QFY17 2QFY17 3QFY17 4QFY17 1QFY18 31.0 29.0 27.0 25.0 23.0 21.0 19.0 17.0 15.0 Net Sales (Rs mn) Growth EBITDA (Rs mn) EBITDA % Exhibit 6: Net income vis-à-vis margins Exhibit 7: 1 year-forward P/E 1,200 1,000 800 600 400 200-19.7 15.7 13.5 12.9 9.6 9.1 4QFY16 1QFY17 2QFY17 3QFY17 4QFY17 1QFY18 19.0 17.0 15.0 13.0 11.0 9.0 140.0 130.0 120.0 110.0 100.0 90.0 80.0 70.0 60.0 50.0 40.0 30.0 PAT (Rs mn) PAT % Forward PE Median 3 Gillette India
Financials Exhibit 8: Income statement Net sales 17,552 17,336 18,744 20,936 23,683 % Growth (11.1) (1.2) 8.1 11.7 13.1 COGS 8,542 7,860 8,463 9,426 10,395 Staff costs 1,068 1,097 1,242 1,371 1,547 Advertising costs 2,387 2,304 2,283 2,522 2,841 Other expenses 2,504 2,259 2,384 2,585 2,896 Total expenses 14,501 13,520 14,372 15,903 17,679 EBITDA 3,051 3,816 4,373 5,033 6,004 % growth 64.7 25.1 14.6 15.1 19.3 EBITDA margin (%) 17.4 22.0 23.3 24.0 25.3 Other income 358 378 503 562 763 Interest costs 53 67 - - - Depreciation 303 384 404 455 505 Profit before tax (before exceptional items) 3,052 3,743 4,472 5,140 6,262 Exceptional items - - - - - Tax 1,062 1,212 1,449 1,665 2,029 PAT 2,123 2,531 3,023 3,475 4,233 PAT margin (%) 11.9 14.3 15.7 16.2 17.3 % Growth 34.3 19.2 19.4 15.0 21.8 Exhibit 10: Balance sheet Share capital 326 326 326 326 326 Reserves 9,040 4,680 5,889 7,279 8,972 Net worth 9,366 5,006 6,215 7,605 9,298 Total debt - - - - - Deferred tax liability (150) (190) (190) (190) (190) Total liabilities 9,252 4,863 6,061 7,451 9,144 Gross block 4,909 5,659 6,409 7,159 7,909 Depreciation 3,051 3,435 3,839 4,294 4,798 Net block 1,858 2,224 2,570 2,865 3,110 Capital work-in-progress 882 633 750 750 750 Investments - - - - - Inventories 2,446 2,224 2,413 2,442 2,685 Debtors 1,098 1,303 1,060 1,005 1,201 Cash 5,372 1,157 2,280 5,554 5,265 Loans & advances 703 299 2,352 599 2,728 Other current assets 396 260 260 260 260 Total current assets 9,733 4,985 6,054 9,302 9,452 Creditors 3,211 3,227 3,728 3,864 4,338 Other current liabilities & provisions 1,632 1,704 1,895 2,160 2,516 Total current liabilities 4,843 4,932 5,623 6,024 6,854 Net current assets 4,890 53 431 3,278 2,597 Total assets 9,252 4,863 6,061 7,451 9,144 Exhibit 9: Cash flow PAT 2,123 2,531 3,023 3,475 4,233 Depreciation 303 384 404 455 505 Other income (358) (378) (503) (562) (763) (Inc.)/dec. in working capital 2398 622 745 427 392 Cash flow from operations 4,519 3,225 3,669 3,794 4,367 Capital expenditure (-) (849) (501) (867) (750) (750) Net cash after capex 3,669 2,724 2,803 3,044 3,617 Dividends paid (-) (976) (6,890) (1,814) (2,085) (2,540) Inc./(dec.) in total borrowings - - - - - Inc./(dec.) in investments - - - - - Cash from financial activities (1,094) (6,987) (1,825) (2,085) (2,540) Others - - - - - Opening cash balance 1,813 5,372 1,157 2,280 5,554 Closing cash balance 5,372 1,157 2,280 5,554 5,265 Change in cash balance 3,559 (4,215) 1,124 3,274 (289) Exhibit 11: Key ratios Y/E June FY16 FY17 FY18E FY19E FY20E Per share (Rs) EPS 65.1 77.7 92.8 106.6 129.9 Book value 287.4 153.6 190.7 233.4 285.3 DPS 24.9 176.2 46.4 53.3 64.9 Valuation (x) P/sales 8.2 9.6 10.2 9.1 8.1 EV/sales 7.9 9.5 10.1 8.9 7.8 EV/EBITDA 45.7 43.3 43.2 36.9 30.9 P/E 68.1 65.8 63.2 55.0 45.1 P/BV 15.4 33.3 30.7 25.1 20.5 Return ratios (%) RoCE 32.7 47.8 70.7 66.3 65.1 RoE 25.3 35.2 53.9 50.3 50.1 Profitability ratios (%) Gross margin 51.3 54.7 54.9 55.0 56.1 EBITDA margin 17.4 22.0 23.3 24.0 25.3 EBIT margin 15.7 19.8 21.2 21.9 23.2 PAT margin 17.0 21.1 23.2 23.9 25.6 Liquidity ratios (%) Current ratio 2.0 1.0 1.1 1.5 1.4 Quick ratio 1.5 0.6 0.6 1.1 1.0 Solvency ratio (%) Debt-to-equity ratio - - - - - Turnover ratios Total asset turnover ratio (x) 1.2 1.8 1.6 1.6 1.5 Fixed asset turnover ratio (x) 9.9 8.1 7.3 7.3 7.6 Debtor days 24 25 23 18 17 Inventory days 95 108 100 94 90 Creditor days 126 149 150 147 144 4 Gillette India
Rating track Date Rating Market price (Rs) Target price (Rs) 29 September 2017 Buy 5,640 7,000 14 November 2017 Buy 5,861 7,000 Rating track graph 6500 6000 5500 5000 4500 4000 3500 Apr-17 May-17 Jun-17 Jul-17 Aug-17 Sep-17 Oct-17 Nov-17 Not Covered Covered 5 Gillette India
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