Gillette India Ltd’s share price is down around 6% since its September quarter results were declared about a month ago. The markets have not taken too kindly to its net profit rising by just 13%, despite revenue rising by around 40%. Things were worse in the June quarter when its net profit had halved. With the Gillette stock trading at a price-earnings multiple of over 40 times (based on its trailing four quarters earnings per share), the profit trend is disappointing.

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The drop in profitability seems to be a conscious strategy to push volumes in the near-term. Gillette India is playing a key role in advancing its parent Procter and Gamble Inc.’s (P&G) strategy for growth in emerging markets. In the September quarter, P&G said Mach 3 razor shipments in India had doubled and Oral-B shipments rose by 50%. This is visible in Gillette India’s financials, too. The grooming segment’s revenue rose by 28% over the year ago period and revenue of the oral care segment by 77%.

But in order to push volumes, the company has been spending heavily on advertising and promotion. These expenses have also been increased to support product launches. Advertising and sales promotion expenses rose by as much as 88% year-on-year in the September quarter. Gillette had launched a cheaper version of its Mach 3 razor to encourage users to upgrade. While the strategy appears to be working, as is visible in the uptick in volumes, it has resulted in higher promotion costs and lower margins. Besides, rising material costs have also affected the company’s margins.

But Mach 3 forms only part of its razor portfolio, which also includes other brands such as Vector Plus, Wilkinson Sword and disposable razors. In the year ended June 2010, its total shaving system and cartridge sales rose by only 5% in volume terms, but by 53% in value terms. That seems to indicate a higher proportion of premium products influencing value sales growth.

At present, Gillette’s effort is to drive volume growth in segments such as grooming where it is already strong, and gain market share in others such as oral care and batteries. When these categories become bigger, it will benefit from better efficiencies and its advertising expenses will also be spread over a larger base. A larger base of users of its razors will result in greater follow-up demand as customers come back for refills. This will give Gillette a steady and high margin revenue stream.

Besides, Gillette’s appetite for growth does not appear to be sated yet. While some years ago, it may have refused a price war to gain share, times have changed. It has dropped Duracell prices by around 30% to spur growth. But the bigger initiative is Gillette Guard, a product designed to upgrade consumers who still use double-edge blades, with a product priced atRs15, and with refills priced at Rs5. With the company pursuing a volume-led growth strategy, its advertising and promotion expenditure can be expected to continue growing at high levels. And, even as sales growth may continue to surprise on the upside, profit can be expected to lag for some time to come. The pressure on its share price may continue till then, as investors may become nervous about the wait involved.

Graphics by Naveen Kumar Saini/Mint

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