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Strong growth; Outperforms peers in Sept quarter

Gillette India Ltd. (GILL’s) Sept’24 quarter saw a sharp beat driven by strong growth of 23% in the Grooming business (5-yr revenue CAGR at 13.6%). The performance looks even more commendable as it comes at a time when FMCG peers are seeing consumption pressure in urban markets. We believe this robust is driven by multiple factors (1) improved rural growth aiding volumes in Guard portfolio, (2) introduction of upgraded Guard product at a higher price point of Rs.12 supported by superior compelling advertisement for Hindi heartland, (3) continued strong growth in the Venus portfolio, (4) reach & coverage increase and (5) premiumization supported by strong traction for Gillette Labs. On the other hand, growth in toothbrush continues to be slow due to competitive intensity in the entry level portfolio. Quarterly margin volatility continues but structurally it is on an upward trajectory through productivity and innovations. Earnings upgrade, recent price correction and roll-forward of our target price (TP) to March’27 EPS, gives us a revised target price (TP) of Rs9,500 (Rs9,035 earlier), implying upside of ~11%. We thus upgrade our rating a notch to ADD. Key monitorable: 1) Sustenance of drivers for Sept’24 quarter revenue beat; 2) Outcome for P&G India businesses from evaluation of "Integrated growth strategy"; 3) Exports & Oral Care recovery.

September’24 Quarter Result Highlights

* Headline performance: Revenue grew by 17.1% YoY to Rs7.8bn (vs est. Rs7bn). EBITDA was up 39.3% YoY to Rs1.9bn (vs est. Rs1.7bn). APAT was up 43.5% YoY to Rs1.3n (vs est. Rs1.1bn).

* Segmental performance: (1) Grooming business (~83% of revenues in Sept’24 Qtr vs 79% in base Qtr) revenue up by strong 23% YoY to Rs6.5bn (vs est. Rs5.7bn). Grooming segment EBIT margin improves by ~640bps YoY to 24.1%. (2) Oral care revenues (17% of revenues in Sept’24 Qtr vs 21% in Sept’23 Qtrs.) were down 5.1% to Rs1.3bn (vs est. Rs1.3bn) with segment EBIT margin down 650bps YoY to 11.8%.

* Margin: Overall gross margin came at 56.4% (vs. est. 55%), up 190bps YoY but down 1,060bps QoQ. Increase in other overheads (up 70bps YoY) was more than offset by lower A&SP spends (down 90bps YoY; absolute A&SP spends up 10.3% YoY) and lower employee costs (down 180bps YoY). Thus EBITDA margin was up 390bps YoY to 24.4% (vs est. 24%).

* Other comments: (1) The growth has been broad based amidst continuing green shoots in rural markets. (2) Change in Chief Financial Officer: Mr. Gautam Kamath, Director & Chief Financial Officer (CFO) has tendered his resignation as the Director & CFO of the Company effective close of business hours of October 31, 2024, as he will be moving onwards to a new assignment as Vice President - Corporate Strategy in the P&G Global Headquarter. The Board of Directors have appointed Ms. Srividya Srinivasan as CFO of the Company and Additional (Executive) Director effective November 1, 2024.

View & Valuation

Over FY24-27E, we estimate 9.8% revenue CAGR. Our current growth estimates do not consider any major reversal in trend towards shaving from ‘sporting beard’ or ‘trimming’. Gross margin recovery was ahead of expectation in FY24, leading to beat on operating margin. Over FY24-27E, we now build ~70bps improvement in EBITDA margin largely led by pricing+premiumization and productivity interventions leading to EBITDA growth of 10.8% over FY24-27E. Gillette’s market share are at highest levels and continues to strengthen. With strong traction in Gillette Labs, upgraded Guard product and continued innovations, it’s market share should further improve or atleast be maintained. GILL boasts strong return ratios and has also shown healthy growth in dividends over the years. Earnings upgrade, recent price correction and roll-forward of our target price (TP) to March’27 EPS, gives us a revised target price (TP) of Rs9,500 (Rs9,035 earlier), implying upside of ~11%. We thus upgrade our rating a notch to ADD. Key monitorable: 1) Sustenance of drivers for Sept’24 quarter revenue beat; 2) Outcome for P&G India businesses from evaluation of "Integrated growth strategy"; 3) Exports & Oral Care recovery.

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