Gillette India Research Report By Nirmal Bang

FY20 performance fully captures lockdown impact; We expect strong growth in FY21 on a low base

We pored over Gillette India’s (GILL) annual report for FY20 (June-ending). Below are the key excerpts from the same:

FY20 (June-ending) performance: Sales, EBITDA and Adj. PAT declined by 9.8%, 5.8% and 9.0%, respectively. Gross margin was up by 70bps at 56.7%, leading to EBITDA margin expansion of 90bps to 21.4%. Advertising expenses were down 9.4% at ~Rs2bn (-110bps to 10.8% of revenues) and trade incentives were down by 61.1% at Rs230mn. The company declared a total dividend of Rs49 per share for FY20.

Industry & demand environment: Pandemic-led lockdown resulted in reduction of shaving frequency among consumers, which significantly affected the company’s sales in April’20 and May’20. With the easing of the lockdown, GILL saw a sharp recovery to the pre-COVID levels since June’20. As of date, production and services are back to pre-COVID levels. In the recent quarter’s results (1QFY21 June-ending), the management mentioned that the strong topline growth of 11.7% YoY was on the back of strong product innovations, trusted portfolio, market recovery and strong execution of brand & retail fundamentals. Despite near term challenges, the company will continue to work towards driving balanced growth on the back of brand fundamentals, strength of the product portfolio and improved execution.

Grooming segment (76.4% of revenue): Grooming business declined by 12% in FY20 but its EBIT margin expanded by ~160bps to 20.5%. The company continued to be the market leader in the men’s grooming category and reached its highest ever market share in FY20 in the Blades and Razors category. While there is a visible reduction in shaving frequency, GILL continuous to add new users to the Gillette franchise, which has been driven by product superiority and commercial innovations. During the year, the company launched Gillette SkinGuard (a premium system razor) and Guard Personal Care portfolio (an entry level pre-shave range of products). Gillette Guard, the company’s pioneering entry-level offering, registered its strongest value, volume and share growth, led by strong awareness, activation and go-to-market strategies. Gillette Double Edge blades continued to grow, led by the launch of the new Gillette Winner. Within the female grooming portfolio, Gillette Venus clocked its strongest value, volume and share growth.

Oral Care segment (23.6% of revenue): Oral Care business declined by 1.9% with EBIT margin contraction of ~310bps to 10.8%. However, the decline of 1.9% in topline was on a strong base of 16.7% growth in FY19 and was backed by growth across value share, volume share and brand penetration. GILL managed to grow ahead of the category on the back of innovations and a strong go-to-market execution. Innovation within the category included the kid’s entry-tier, sensitive entry-tier, clove portfolio across tiers and rechargeable electric toothbrush for kids featuring Star Wars and Frozen characters. The company continued to leverage its targeted trial programs and deeper distribution plans to enable more consumers to have access to superior brushes. During the year, Oral-B continued its collaboration with dentists to promote oral health awareness via the free dental checkup program.

Response to the pandemic & CSR: In response to the pandemic, the group launched P&G Suraksha India to serve communities by partnering with government and relief organizations. It also reinvented its flagship CSR program P&G Shiksha to reach children remotely. Further, GILL launched the Gillette Barber Suraksha Program to enable the barber community restart their business while maintaining high standards of safety, health and hygiene. The company, through its Safalta Apni Mutthi Mein program, continues to groom the youth of the nation on key skills required to increase employability and has reached over 8000+ colleges & universities.

Outlook and valuation: With the easing of lockdown, GILL has seen a sharper-than-expected recovery since June’20. Going forward, we expect the company to deliver even higher growth in the rest of FY21 due to a low base, market recovery, service levels already coming back to pre-Covid levels in 1QFY21, product innovations and strong retail execution. The stock currently trades at 57.4x/50.1x/45.1x FY21E/FY22E/FY23E EPS. We retain our Accumulate rating with a target price (TP) of Rs5,895 by assigning a P/E multiple of 50x on September 2022 EPS.