Gillette India Ltd is aggressively pursuing growth, which had a mixed effect on its June quarter performance. Sales growth rose sharply, but profits fell due to a faster increase in expenses. Sales in the June quarter rose by 37% to Rs252 crore over the year-ago period, higher than the full year’s 29% growth. The company’s year ends in June. But its net profit nearly halved to around Rs19 crore during the quarter.
Sales of razors and blades, with a share of around 70%, rose by 24%. It underperformed the company’s overall growth, however. A rollback of excise duty cuts from March could be one reason for slower sales growth. The star of the quarter was the oral care business, which markets Oral-B toothbrushes. Sales rose by 88% to Rs63 crore and sales of batteries rose by 37% to Rs13 crore.
Expenses rose by 70% during the quarter, which led to a sharp fall in margins from 29% to 12%. The main reasons were a sharp increase in material and employee costs, and expenditure on advertising and promotions more than tripled. This was due to higher marketing investments in the blades and razors business and in trade investments. Higher level of advertising in the personal care market and the need to provide support for new products and widen distribution are some of the reasons for higher expenses.
Graphic: Ahmed Raza Khan/Mint
A higher proportion of lower priced products could have also contributed to higher material costs. Gillette’s inventory levels have risen, possibly indicating a build-up that may be visible in the current quarter’s performance. Some of these effects could, thus, be temporary.
A small royalty payment has debuted in this quarter, and if it increases, is a cause for concern.
Procter and Gamble Co.’s desire to grow faster in emerging markets will see its Indian subsidiaries such as Gillette continue to target higher growth. Gillette India’s focus will be on building up scale, but the process may see its profits getting singed occasionally. Its share trades at a relatively high price-earnings multiple of around 46 times its fiscal 2010 earnings. Part of this valuation is attributable to its strong position in its main business and to its performance. If the next few quarters do not see profit growth coming back, investors may begin to show concern.