Gillette India: Losing the cutting edge?

Recommendation

Risk averse: Pare down exposures

Risk bearing: Hold

Aarati Krishnan

THE Gillette India stock has piggybacked on the recent rally to register a 20 per cent appreciation over the past couple of weeks.

The stock now hovers at the Rs-300 levels, having recovered from its all-time low of Rs 260. Investors not comfortable with a high degree of risk can take this opportunity to pare down exposures to the stock.

After the merger of two group companies - Wilkinson Sword India and Duracell India - with Gillette India in 2000, earnings prospects carry a higher degree of uncertainty than before. However, the merger has left Gillette with a larger scale of operations, a wider product portfolio and a higher promoters' stake. These point to the possibility of a recovery in financial performance over the longer term.

In 2000, Gillette India merged two wholly-owned subsidiaries of the parent with itself, resulting in a substantial change in its business profile. Earlier, Gillette India straddled the higher end of the male grooming market with brands such as Wilmans double-edged, Gillette Sensor Excel, Mach III Shaving System and the Gillette range of shaving preparations.

However, the merger has expanded the product portfolio, which now includes the Wilkinson Sword range of razors and blades that cater to the mass market. The company has also acquired the battery business comprising of the Duracell and Geep range of batteries.

Apart from a larger scale of operations and a broad-based product basket, many more of the parent's key brands are now within the fold of the listed company. This enhances the possibility that new product launches from the parent will be routed through Gillette India in future.

However, the merger has brought its share of problems as well. Along with a larger scale of operations, Gillette has also inherited a higher equity base (which has tripled from Rs 12.86 to Rs 32.58 crore), higher levels of debt in its balance-sheet (debt-equity of 0.5:1 against 0.3:1) and a much lower Return on Net Worth (11 per cent against 22 per cent in 1999).

Gillette's operating profit margin has seen a significant drop post-merger, from 19 per cent in 1999 to 12.5 per cent in 2000. Tax shelter derived from the merger (Gillette wrote back a tax provision worth Rs 5.85 crore in 2000) helped salvage the bottomline in 2000. But in 2001, the tax shelter has been inadequate to compensate for the rise in interest and depreciation charges.

In the first nine months of 2001, Gillette India has reported a 23 per cent growth in sales, but operating profits actually dropped 18 per cent. With interest and depreciation charges rising 37 per cent, the company has closed the nine-month period with a net loss. The loss at the net level is undoubtedly the result of a few items of a one-time nature - a surge in depreciation due to the commissioning of an expansion project, write-offs associated with the streamlining of operations after the merger and a rationalisation of inventories.

A clearer picture of Gillette's financials will emerge once it is out of this initial transition period. Nevertheless, the sharp deterioration in operating profit margins and the fact that Gillette will now have to report a quantum jump in net profits to service its high equity base, create uncertainty about the financial performance over the next couple of years. Investors willing to wait for a longer period of time can hold on to their investments.