Gillette’s stock may not see a clean run

Factors such as work from home, job losses, and fewer social events indicate slower biz recovery

The stock of Gillette India (Gillette) has gained over 7 per cent since the start of August, outperforming the Nifty FMCG index, which has fallen 5 per cent during the same period. While the stock’s underperformance to the sectoral index since March lows (the stock is up 16 per cent since March lows, against a 22.3 per cent rise in the Nifty FMCG index) partly explains its recent rally, the easing of the lockdown and partial resumption of offices have revived investor sentiment towards the stock. Analysts, however, believe the business recovery for Gillette will take time.

According to Rajeev Anand, analyst at Narnolia Financial Advisors, “Though economic activities are slowly getting back, factors, such as job losses, work from home, limited social events, etc, will restrict top-line growth of Gillette.” Downtrading (consumer shifting to lowpriced products/brands) and changing male grooming style (full-beard look) shall further impact Gillette’s growth, he added.

Given that the company earns over 75 per cent of its revenue from the male grooming segment (products like razors, trimmers and shaving creams) and the rest from oral care category (Oralb brand), the above-mentioned factors don't auger well.

Though the company witnessed a good recovery in June and July, this does not necessarily indicate full demand recovery. “A sharp recovery was seen in June/july from the precovid levels following the easing of the lockdown. Though we believe sales will pick up, it will be led by pentup demand in the grooming business,” said Vishal Punmiya, analyst at Nirmal Bang in his June-2020 quarter (Q4) result note. The company follows the July to June accounting period.

While there are doubts over the sustenance of nearterm demand, Gillette's longterm prospects remain intact. Punmiya says Gillette’s wide portfolio, innovation, and strong market execution capability should improve its share in the grooming category.

In the fourth quarter, Covid-19-led disruptions resulted in a 24.4 per cent year-on-year (YOY) fall in sales to ~351 crore. While revenue from its grooming segment was down 21.1 per cent, oral care sales plunged about 36 per cent over the year-ago quarter. However, benign input costs and stringent cost control protected its bottom line. Its pre-tax profit jumped over 4x YOY to ~66.7 crore. In the ensuing quarters, it needs to be seen to what extent Gillette keeps its margins and earnings.

Overall, investors are recommended to wait until some signs of sales recovery emerge and not to fall for the recent run-up in the stock, which is currently trading at 48x its FY22 estimated earnings.