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Adjusted operating performance largely in-line

Gillette India Ltd. (GILL’s) Sept’23 quarters revenue was in-line with our estimate. Grooming business (79% of Sep’23 revenues) crossed the Rs5bn quarter revenue mark for the first time ever, growing by 7.8% YoY (~9% on a 5-year CAGR). Reported margins for the quarter was supported by premiumization and deliberate productivity interventions. This was partially offset by a one-time expense. Excluding one-time impact, profit for the quarter was ahead of our estimate. There was also a sharp increase in Advertising & sales promotion expenses (A&SP) for the quarter (140bps higher than our estimate), which suppressed the overall operating performance. In its recent analyst meet, management mentioned that Gillette’s market share gain was faster in last 18 months and now stands at highest ever level of >60%. With aggressive spending, we believe Gillette’s market share should further improve or atleast be maintained in a competitive macro-economic environment. While the volatility in quarterly margin delivery continues, management in its recent analyst has clearly called out its aim to grow bottom-line faster than topline even while near-term cost pressure stays. We continue to maintain our ADD rating with a revised target price (TP) of Rs6,850, as we roll-forward to Sept’25.

Sept’23 Quarter Result Highlights

* Sep’23 Qtr headline performance: Revenue grew by 7.7% YoY to Rs6.7bn (vs est. Rs6.7bn). Reported EBITDA was up just 0.7% YoY to Rs1.37bn (vs est. Rs1.43bn). Reported PAT was up 6.8% YoY to Rs927mn (vs est. Rs907mn).

* Excluding one-time impact, operational PAT is up 14% YoY (~9% above our estimate). While the nature of one-time cost is not clear, looking at the inflated YoY number, we believe it is in employee cost. Adjusted EBITDA should be 1-2% above our estimate.

* Sep’23 segmental performance: Grooming business (up 10bps YoY to ~79% of revenues in Sep’23 Qtr) revenue up by 7.8% YoY to Rs5.3bn (vs est. Rs5.3bn). Grooming segment EBIT margin was down ~270bps YoY to 17.7%. Oral care revenues grew by 7.3% to Rs1.4bn (vs est. Rs1.4bn) with segment EBIT margin up 350bps YoY to 18.3%.

* Overall gross margin came in at 54.6% (vs. est. 53%), up 30bps YoY and +580bps QoQ. Higher A&SP (up 80bps YoY) and increase in employee cost (up 130bps YoY) was only partially offset by lower other overheads (down 30bps YoY), which meant that EBITDA margin was down 140bps YoY to 20.5% (vs est. 21.4%).

Key points in press release

(1) Growth driven by superior retail execution, strong brand fundamentals and integrated growth strategy.

(2) Profitability led by premiumization, deliberate productivity interventions, partially offset by a one-time expense.

View & Valuation

Looking at Sep’23 quarters performance, we continue to expect revenue to grow in 8-10% range in coming quarters led by 1) Continued momentum in grooming segment with an added support from rural if recovery picks up pace aiding value portfolio, 2) Recovery in oral care on lower base. Over FY23-26E, we estimate 8% revenue CAGR. Our current growth estimates do not consider any strong reversal in trend towards shaving from ‘sporting beard’ or ‘trimming’. We expect strong gross margin expansion in FY24 vs FY23 but increase in A&SP will restrict EBITDA margin expansion. Over FY23-26E, we build ~100bps improvement in EBITDA margin largely led by lower COGS leading to EBITDA growth of ~10% over FY23-26E. The company boasts strong return ratios. It has also shown healthy growth in dividends over the years. Last fiscal, the management thought it was prudent to not continue to keep growing the dividend and took a pause but even then, the payout remains healthy. While this is a softer aspect, we consider management recently addressing investors & analysts as a positive. GILL is currently trading at ~47x/43x June’25/June’26 EPS. We assign a target multiple of ~50x and roll forward to Sept’25 EPS (3yr/5yr avg fwd. multiple ~52x/64x), arriving at a revised TP of Rs6,850 (Rs6,650 earlier). Maintain ADD.

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