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Exports impact topline; Margin surprises positively

Gillette India Ltd. (GILL’s) Dec’23 quarters revenue was below estimate but margin surprised positively. Domestic sales grew ~6% for the quarter, which means exports business (~8.2% of FY23 revenues) saw a sharp decline. GILL exports its products to 17 countries including neighboring countries like Bangladesh, Nepal and Sri Lanka. Both the segments came in below our estimate for the quarter. Gross/EBITDA margin at 58.1%/24.4%, witnessed sharp improvement largely driven by productivity interventions, product price-mix and moderating cost inflation. A&SP spends has come down slightly in 2Q, but GILL has maintained spends at 13.7% level in 1HFY24 (flat YoY). We continue to build bottom-line growth faster than topline as called out by the management. Maintain ADD rating with a revised target price of Rs7,350 (Rs6,850 earlier). Key monitorables: 1) Outcome for P&G India businesses from evaluation of "Integrated growth strategy", media sources; 2) Exports and non-Urban market recovery; 3) COGS outlook.

Dec’23 Quarter Result Highlights

* Headline performance: Revenue grew by 3.4% YoY to Rs6.4bn (vs est. Rs6.7bn). EBITDA was up 23.6% YoY to Rs1.6bn (vs est. Rs1.3bn). PAT was up 39.6% YoY to Rs1bn (vs est. Rs855mn).

* Segmental performance: Grooming business (~80.4% of revenues in Dec’23 Qtr vs 79.9% in Dec’22 Qtr) revenue up by 4% YoY to Rs5.1bn (vs est. Rs5.4bn). Grooming segment EBIT margin improves sharply by ~550bps YoY to 25.1%. Oral care revenues grew just 0.9% to Rs1.25bn (vs est. Rs1.35bn) with segment EBIT margin down 210bps YoY to 5.2%.

* Margin: Gross margin surprised us positively and came at 58.1% (vs. est. 52.5%), up 600bps YoY and +350bps QoQ. Increase in employee cost (up 150bps YoY) and other overheads (up 140bps YoY) was partially offset by lower A&SP spends (down 90bps YoY; absolute A&SP spends down 4% YoY). Thus, EBITDA margin was up 400bps YoY to 24.4% (vs est. 19.8%).

* 1HFY24 (Jul’23-Dec’23) performance: Revenue, EBITDA and PAT grew by 5.5%, 11.7% and 22% YoY, respectively. Grooming business revenue (79.7% of revenues) up 5.9% YoY while Oral Care up 4.2% YoY. Gross margin up by 310bps YoY to 56.3%. EBITDA margin up 120bps YoY to 22.4%. A&SP flat YoY at 13.7% of revenue (+5.2% YoY in absolute basis).

Key points in press release

(1) Domestic sales is up 6% vs year ago, driven by a robust portfolio, superior retail execution and strong brand fundamentals.

(2) Profit growth largely driven by productivity interventions, product price-mix and moderating cost inflation.

View & Valuation

Due to impact from exports business, we now expect revenue to grow by ~6% in FY24E and ~8% in FY25E led by 1) Continued momentum in grooming segment with an added support from rural anticipating recovery, aiding value portfolio, 2) Recovery in oral care on lower base, 3) Exports recovery in FY25. Over FY23-26E, we estimate 7.1% revenue CAGR. Our current growth estimates do not consider any major reversal in trend towards shaving from ‘sporting beard’ or ‘trimming’. Our expectation gross margin recovery has already panned out decently in 1HFY24. Over FY23-26E, we build ~110bps improvement in EBITDA margin largely led by lower COGS leading to EBITDA growth of ~9% over FY23-26E. 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%. We continue to believe Gillette’s market share should further improve or atleast be maintained in a competitive macroeconomic environment. The company boasts strong return ratios. It has also shown healthy growth in dividends over the years. GILL is now trading at ~52x/48x June’25/June’26 EPS. We assign a target multiple of ~51x on Mar’26E EPS (3yr/5yr avg fwd. multiple ~51x/62x), arriving at a revised TP of Rs7,350 (Rs6,850 earlier). Maintain ADD.

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