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Gillette India Ltd. (GILL’s) Jun’24 quarter’s operating performance was above our estimate led by strong margin performance even while sales was slightly lower than our estimate. Grooming business growth of 7.1% was lower than our expectation but this should improve going forward led by rural recovery, pricing action in value portfolio, premiumization supported by strong traction for Gillette Labs, continued double-digit growth in Venus portfolio. Quarterly margin volatility continues with gross margin sharply up 1,830bps YoY and 1,360bps QoQ largely due to lower trading goods YoY and change in inventory levels. Increase in overheads meant that EBITDA margin was up 390bps YoY to 27%. The stock is up ~27% in last three months and ~63% post our initiation on 30th Aug 2023. Due to the strong rally, we downgrade our rating to NEUTRAL from BUY earlier with a revised target price (TP) of Rs9,035 (Rs7,400 earlier). Key monitorables: 1) Outcome for P&G India businesses from evaluation of "Integrated growth strategy"; 2) Exports and non-Urban market recovery.

June’24 Quarter Result Highlights

* Headline performance: Revenue grew by 4.2% YoY to Rs6.5bn (vs est. Rs6.7bn). EBITDA was up 21.5% YoY to Rs1.7bn (vs est. Rs1.6bn). APAT was up 26.4% YoY to Rs1.2bn (vs est. Rs1.0bn).

* Segmental performance: (1) Grooming business (~80.5% of revenues in June’24 Qtr vs 79% in June’23 Qtr) revenue up by 7.1% YoY to Rs5.2bn (vs est. Rs5.3bn). 5-yr revenue CAGR stood at 7.5%. Grooming segment EBIT margin improves by ~830bps YoY to 26.8%. (2) Oral care revenues were down 6.3% to Rs1.3bn (vs est. Rs1.3bn) with segment EBIT margin down 1,320bps YoY to 10.3%.

* Margin: Overall gross margin came at 67.1% (vs. est. 51%), up 1,830bps YoY and 1,360bps QoQ. This was largely due to lower trading goods YoY and change in inventory levels. Increase in Other overheads (up 350bps YoY), higher A&SP spends (up 1,070bps YoY; absolute A&SP spends up 160.8% YoY) and higher employee costs (up 20bps YoY) meant that EBITDA margin was up 390bps YoY to 27% (vs est. 23.6%).

* FY24 (Jul’23-Jun’24) performance: Revenue, EBITDA and APAT grew by 6.3%, 16.4% and 15.8% YoY, respectively. Grooming business revenue (80.5% of revenues) up 8.1% YoY while Oral Care (19.5% of revenues) was flat YoY. Overall gross margin up by 610bps YoY to 58.2%. EBITDA margin up 210bps YoY to 23.8%. A&SP up 200bps YoY at 13.8% of revenue (up 24.4%YoY on absolute basis).

* Comments from press release: 1) This fiscal, GILL launched Gillette Labs in the male razor category, Venus Bikini Sensitive Razors in female razor category and Oral B' Chhota Bheem' toothbrushes in Oral care segment. 2) BOD have recommended a final dividend of Rs45 per equity share for the financial year ended June 30, 2024.

View & Valuation

We expect revenue to grow by ~8.2% in FY25E on a base of ~6.3% led by 1) Continued momentum in grooming segment with an added support from value portfolio as we anticipate rural volume recovery in near-term, 2) Growth recovery in oral care on lower base, 3) Exports recovery in FY25. Over FY24-26E, we estimate ~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 FY24-26E, we now build ~80bps improvement in EBITDA margin largely led by pricing+premiumization and productivity interventions leading to EBITDA growth of 9.7% over FY24-26E. Gillette’s market share are at highest levels and continue to gain. With continued innovations, it’s market share should further improve or atleast be maintained in a competitive environment. The company boasts strong return ratios and has also shown healthy growth in dividends over the years. The stock is up ~27% in last three months and ~63% post our initiation on 30th Aug 2023. It now trades at ~64x/57x June’25/June’26 EPS. Due to the strong rally, we downgrade our rating to NEUTRAL from BUY earlier with a revised TP of Rs9,035 (Rs7,400 earlier), assigning a target multiple of ~56x on Sep’26E EPS (similar to its 5yr avg fwd. multiple).

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