Colgate Palmolive - result...

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Edelweiss Securities Limited

Colgate Palmolive’s (Colgate) revenue was in line with our estimate while

PAT surpassed expectations due to lower tax rate (favourable order for

prior period), tight control on other costs (likely lower promotions and

scale benefits) and a drop in staff costs (Q2FY12 costs higher due to one-

off – VRS compensation). Key positives were: (i) ~11% YoY volume growth

in toothpaste category (overall volume growth of ~10% YoY); (ii) highest

market share in toothpaste at 54.3% (in Jan-Sep 2012 against 52.3% in

Q2FY12) and (iii) volume market share of 39.0% (Jan-Sep 2012) in the

toothbrush category. The key negative was 177bps YoY dip in gross

margin. Colgate has seen minor correction in overall volume growth (1-

2% points dip from 12% average in FY12 and 11% in Q1FY13) due to

decline in CSD sales (contributing ~6% of sales, decline also seen in other

Consumer companies) and some softness in growth in a few top-end

products. We like Colgate’s dominance and investment in growth drivers

(mouthwash, new toothpaste variants – Sensitive, Ice and launches in

toothbrush – Electric, Kid’s special range). Maintain ‘HOLD’.

Raw material pressure mounts – highest in past 11 quarters

Colgate’s revenue jumped 17.5% YoY to ~INR7.9bn (against Dabur’s 10.2% growth in

toothpaste and HUL’s double digit growth in oral care). Gross margin contracted

177bps YoY. COGS pressure was offset by lower employee costs (down 212 bps YoY)

and other expenses (down 317bps YoY); ad spends inched up 50bps YoY. EBITDA

margin thus expanded a massive 302bps YoY to 22.2%. A spurt of 45.5% YoY in PAT

was aided by lower tax rate of 19.4%. The tax rate is expected to increase to 25-26% in

FY13E and staff costs are likely to stabilize at current levels (7-8% of sales).

Outlook and valuations: Fairly valued over near term; maintain ‘HOLD’

We continue to like Colgate’s focus on innovation and dominance. The toothpowder

category posted a double digit volume decline which indicates up-trading of consumers

to toothpaste which is beneficial for Colgate. We expect P&G to enter Toothpaste over

the longer term which is the key risk to Colgate. At CMP, the stock is trading at 30.6x

and 26.6x FY13E and FY14E, respectively and appears fairly valued over the near term.

We maintain ‘HOLD’ and rate the stock ‘Sector Performer’.

RESULT UPDATE

COLGATE PALMOLIVE Bites more into the toothpaste market

EDELWEISS 4D RATINGS

Absolute Rating HOLD

Rating Relative to Sector Performer

Risk Rating Relative to Sector Medium

Sector Relative to Market Underweight

MARKET DATA (R: COLG.BO, B: CLGT IN)

CMP : INR 1,237

Target Price : INR 1,349

52-week range (INR) : 1,288 / 932

Share in issue (mn) : 136.0

M cap (INR bn/USD mn) : 168 / 3,116

Avg. Daily Vol.BSE/NSE(‘000) : 87.3

SHARE HOLDING PATTERN (%)

Current Q1FY13 Q4FY12

Promoters %

51.0 51.0 51.0

MF's, FI's & BK’s 6.0 6.0 6.6

FII's 20.9 20.9 20.2

others 22.1 22.1 22.2

* Promoters pledged shares

(% of share in issue)

: NIL

PRICE PERFORMANCE (%)

Stock Nifty

EW Consumer

Goods Index

1 month 4.6 (0.0) 4.9

3 months 6.5 11.2 13.5

12 months 26.2 12.7 45.0

Abneesh Roy

+91 22 6620 3141

[email protected]

Hemang Gandhi

+91 22 6620 3148

[email protected]

Pooja Lath

+91 22 6620 3075

[email protected]

India Equity Research| Consumer Goods

October 29, 2012

Financials

Year to March Q2FY13 Q2FY12 % change Q1FY13 % change FY12 FY13E FY14E

Revenues (INR mn) 7,924 6,744 17.5 7,561 4.8 26,932 31,877 37,256

EBITDA (INR mn) 1,758 1,292 36.0 1,625 8.2 5,785 7,158 8,433

PAT (INR mn) 1,451 997 45.5 1,174 23.5 4,465 5,493 6,322

Diluted EPS (INR) 10.7 7.3 45.5 8.6 23.5 32.8 40.4 46.5

Diluted P/E (x) 37.7 30.6 26.6

EV/EBITDA (x) 28.5 22.8 19.3

ROAE (%) 109.0 117.1 116.7

Consumer Goods

2 Edelweiss Securities Limited

Likely P&G’s entry in the toothpaste market over longer term

P&G launched Oral‐B toothpaste in several countries like Venezuela, Greece, Portugal and

Israel, and aims to launch it in several more markets over the next six months. We believe

the Indian toothpaste market is a tough nut to crack as it is very strongly dominated by

Colgate which has sustained its leadership for over a decade owing to its strong distribution

network, brand equity, high level of consumer awareness programmes through continuous

on-ground events. It will thus be a difficult and expensive affair for P&G to establish ground

in the Indian toothpaste market over the short term given that P&G’s performance in China

(one of their largest markets) continues to lag competitors. Hence its aggression in India is

likely to be on lower side as it is likely to focus on existing portfolio. However, in the longer

term, it is a logical step for P&G to expand its presence in the oral care market (already

present in toothpaste category and doing well).

Up-trading to toothpaste augurs well for Colgate

Despite the impact of CSD slowdown (contributing ~6% of sales), Colgate clocked 10% YoY

growth in overall volume in Q2FY13. Of the overall volume growth, ~11% YoY was on

account of the toothpaste category. While the toothbrush category reported volume surge

of ~16% YoY, the toothpowder category posted a double digit volume decline which

indicates up-trading of consumers to toothpaste which is beneficial for Colgate with its

superior brand equity. The Mouthwash category also performed well, and has a market

share of 26.8% (Jan-Sep 2012).

Capacity expansion

Colgate has leased 39acres of land in Gujarat at Sanand for INR426mn for a toothpaste

plant. It also plans to set up a toothpaste manufacturing plant at Sri City in southern Andhra

Pradesh where it has paid INR114mn as a part of initial lease payment for 29acres of land.

Pace of new launches keeps intact

Colgate launched two new offerings in the toothpaste category with Colgate Total Advance

Whitening and Colgate Max Fresh Ice toothpaste.

Commencement of ‘Oral Health Month’

Colgate along with the Indian Dental Association (IDA) has commenced its 9th

edition of Oral

Health Month (2-month long intensive oral care awareness initiative) aimed at improving

the oral health condition and generating awareness about tooth cavities nationwide. The

initiative is backed with 13 mobile dental vans that would travel across 39 cities.

Battle for Indian toothpaste market

Despite some effect of CSD slowdown (contributing ~6% of sales), Colgate clocked 10% YoY

growth in overall volume in Q2FY13. While its toothpaste posted a 11% YoY growth in

volumes, Colgate’s strongest competitor in the toothpaste category, Hindustan Unilever’s

(HUL) oral care portfolio grew in double digits YoY (largely volume led) backed by robust

growth in Close Up (re-launched in Q1FY13) and the Pepsodent brands (driven by premium

range). On the other hand, Dabur’s toothpaste category growth at 10.2% YoY was moderate

due to Company’s realignment in focus from volume to margin play. This resulted in under

performance of its discount brand Babool (contributing ~50% of Dabur’s oral care

revenues). Its premium segment (Meswak and Dabur Red toothpaste) posted good growth.

Colgate Palmolive


Outlook and valuations: Fairly valued over near term; ‘HOLD’

We continue to like Colgate’s continued focus on innovation, market stronghold and

building brand equity. Based on its superior product mix, increasing toothpaste volume

market share and higher growth compared to competitors, we have assigned the stock

higher target P/E of 29.0x (28.0x earlier) and assign it a target price of INR1,349. We have

also increased our EPS for FY13 and FY14 by 4.8% & 4.3% respectively (to INR40.4 and

INR46.5) as the company has efficiently reduced its costs through scale benefits and lesser

promotion. We maintain ‘HOLD’ and rate the stock ‘Sector Performer’ on relative return

basis.

Chart 1: COGS pressure leads to gross margin contraction YoY

Source: Company, Edelweiss research

Chart 2: EBITDA margin expand YoY


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Expert Protection Range launch

has helped Hindustan Unilever

post double digit growth in Oral

care.

Consumer Goods


Chart 3: EBITDA Margin profile: Other expenditure contract 317bps


Chart 4: Tax rate dip to 19.4%


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Colgate Palmolive


Table 1: Balance sheet as on 30th

September 2012


(INR mn) Sep-12 Mar-12 % change

Sources of funds

Share capital 136 136 -

Reserve & surplus 4,788 4,218 13.5

long term liabil ity 7 8 (7.9)

Long term provisions 305 301 1.3

Trade payables 4,100 3,690 11.1

Other current l iabil ities 3,371 2,172 55.2

Short term provisions 817 772 5.8

Total 13,523 11,296 19.7

Uses of funds

Fixed assets 3,532 3,238 9.1

Non current investments 371 471 (21.2)

Deferred tax assets 117 121 (3.1)

Long term loans & advances 535 225 137.6

Other non current assets 3 4 (16.7)

Current investments 100 - NM

Inventories 1,743 2,177 (19.9)

Trade recievables 1,098 873 25.8

Cash & bank balance 4,808 3,098 55.2

Short term loans & advances 1,170 1,021 14.6

Other current assets 46 69 (32.7)

Total 13,523 11,296 19.7

Consumer Goods


Financial snapshot (INR mn)

Year to March Q2FY13 Q2FY12 % Change Q1FY13 % Change FY12 FY13E FY14E

Net revenues 7,738 6,572 17.7 7,361 5.1 26,239 31,066 36,348

Other operating income 187 172 8.6 200 (6.8) 694 811 909

Total operating income 7,924 6,744 17.5 7,561 4.8 26,932 31,877 37,256

Cost of goods sold 3,238 2,637 22.8 2,997 8.0 10,502 12,448 14,466

Gross profit 4,686 4,108 14.1 4,564 2.7 16,430 19,429 22,790

Staff costs 543 605 (10.3) 624 (13.0) 2,156 2,454 2,871

Advt. sales & promotions 889 723 23.0 837 6.2 2,630 3,138 3,671

Other expenses 1,496 1,487 0.6 1,478 1.2 5,859 6,679 7,815

Total exp. (excl. cogs) 2,928 2,815 4.0 2,939 (0.4) 10,645 12,271 14,357

EBITDA 1,758 1,292 36.0 1,625 8.2 5,785 7,158 8,433

Depreciation 106 106 0.3 105 0.9 393 468 543

EBIT 1,652 1,187 39.2 1,520 8.7 5,392 6,690 7,890

Other income 149 108 37.4 112 32.5 507 603 618

EBIT including other income 1,801 1,295 39.0 1,632 10.3 5,899 7,293 8,507

Interest - 6 (100.0) - 15 18 22

Profit before tax 1,801 1,289 39.6 1,632 10.3 5,884 7,276 8,486

Provision for taxes 350 293 19.5 457 (23.5) 1,419 1,783 2,164

Core profit 1,451 997 45.5 1,174 23.5 4,465 5,493 6,322

Reported net income 1,451 997 45.5 1,174 23.5 4,465 5,493 6,322

Equity capital 136 136 136 136 136 136

No. of shares (mn) 136 136 136 136 136 136

Diluted EPS (INR) 10.7 7.3 45.5 8.6 23.5 32.8 40.4 46.5

As % of net revenues

COGS 40.9 39.1 39.6 39.0 39.1 38.8

Employee cost 6.9 9.0 8.3 8.0 7.7 7.7

Adv. & sales promotions 11.2 10.7 11.1 9.8 9.8 9.9

Other expenditure 18.9 22.0 19.5 21.8 21.0 21.0

EBITDA 22.2 19.2 21.5 21.5 22.5 22.6

EBIT incl. other income 22.7 19.2 21.6 21.9 22.9 22.8

PBT 22.7 19.1 21.6 21.8 22.8 22.8

Reported net profit 18.3 14.8 15.5 16.6 17.2 17.0

Tax rate 19.4 22.7 28.0 24.1 24.5 25.5

Colgate Palmolive


Company Description

Colgate is India’s biggest oral care products company with more than 95% of its sales

coming from this product category. The company has products across variants and price

points in toothpaste, toothpowder, and toothbrushes, and is the leader in each of these

categories.

Investment Theme

Colgate is market leader in oral care category with ~54.5% market share in toothpaste

category and enjoys strong brand equity, built over the years through high investment on

creating consumer awareness and brand recall. Volume growth would also remain robust

riding rise in both penetration and per capita consumption. Also, new categories like

sensitive toothpaste and mouthwash will further enhance growth and premiumisation.

However, higher competition will induce Colgate to increase its brand spends, which could

cap its margins.

Key Risks

New entrants like P&G could hit the company hard.

Further risks arise from down trading by consumers due to the delayed monsoon, gloomy

macroeconomic environment and rising food inflation.

Deficient rainfall could impact agricultural activity, which in turn could hit rural demand.

Sharp rise in input prices or continued depreciation of the INR could increase cost of

imported chemicals.


Consumer Goods

Financial Statements

Key Assumptions

Year to March FY10 FY11 FY12 FY13E FY14E

Macro - GDP(Y-o-Y %) 8.4 8.4 6.5 5.8 6.5

Inflation (Avg) 3.6 9.9 8.8 7.8 6.0

Repo rate (exit rate) 5.0 6.8 8.5 7.5 6.8

USD/INR (Avg) 47.4 45.6 47.9 53.5 52.0

Company - Volume growth (%) 14.7 9.4 12.0 10.5 10.4

Pricing change (%) 1.1 3.7 6.2 7.8 6.5

COGS as % of sales 38.2 38.1 39.0 39.1 38.8

A&P as % of sales 14.7 9.9 9.8 9.8 9.9

Income statement (INR mn)


Net revenue 19,625 22,206 26,239 31,066 36,348

Other operating income 727 656 694 811 909

Total operating income 20,352 22,861 26,932 31,877 37,256

Materials costs 7,768 8,720 10,502 12,448 14,466

Gross profit 12,584 14,141 16,430 19,429 22,790

Employee costs 1,591 1,932 2,156 2,454 2,871

Other expenses 3,014 4,800 5,859 6,679 7,815

Advertisement & sales costs 2,994 2,264 2,630 3,138 3,671

EBITDA 4,985 5,146 5,785 7,158 8,433

Depreciation & Amortization 376 342 393 468 543

EBIT 4,609 4,803 5,392 6,690 7,890

Other income 254 412 507 603 618

Interest expenses 15 16 15 18 22

Profit before tax 4,848 5,199 5,884 7,276 8,486

Provision for tax 615 1,174 1,419 1,783 2,164

Net profit 4,232 4,026 4,465 5,493 6,322

Profit after minority interest 4,232 4,026 4,465 5,493 6,322

Diluted EPS (INR) 31.1 29.6 32.8 40.4 46.5

Dividend per share (INR) 20.0 20.0 23.9 29.1 33.5

Dividend payout (%) 64.3 67.5 72.9 72.0 72.0

Common size metrics - as % of net revenues


Materials costs 38.2 38.1 39.0 39.1 38.8

Employee expenses 7.8 8.5 8.0 7.7 7.7

EBITDA margins 24.5 22.5 21.5 22.5 22.6

EBIT margins 22.6 21.0 20.0 21.0 21.2

Net profit margins 20.8 17.6 16.6 17.2 17.0

Growth ratios (%)


Rev. growth (%) 15.8 12.3 17.8 18.4 16.9

EBITDA 90.5 3.2 12.4 23.7 17.8

Net profit 97.6 (4.9) 10.9 23.0 15.1

EPS growth (%) 97.6 (4.9) 10.9 23.0 15.1


Colgate Palmolive

Balance sheet (INR mn)

As on 31st March FY10 FY11 FY12 FY13E FY14E

Equity capital 136 136 136 136 136

Reserves & surplus 3,125 3,705 4,218 4,894 5,672

Shareholders funds 3,261 3,841 4,354 5,030 5,808

Unsecured loans 46 1 1 - -

Borrowings 46 1 1 - -

Deferred tax liability (179) (168) (121) (121) (121)

Sources of funds 3,128 3,673 4,233 4,909 5,687

Gross block 5,345 5,798 6,132 7,432 8,082

Depreciation 2,876 3,248 3,587 4,055 4,598

Net block 2,469 2,550 2,544 3,376 3,483

Capital work in progress 62 82 694 80 60

Investments 210 387 471 471 471

Inventories 1,106 1,537 2,177 2,190 2,552

Sundry debtors 98 430 449 512 589

Cash and equivalents 3,476 3,956 3,102 4,245 5,426

Loans and advances 1,222 1,122 1,742 1,742 1,742

Total current assets 5,901 7,044 7,469 8,688 10,309

Sundry creditors and others 4,267 4,699 4,793 5,554 6,484

Provisions 1,248 1,693 2,153 2,153 2,153

Total current liabilities & provisions 5,515 6,392 6,945 7,707 8,637

Net current assets 387 653 524 981 1,672

Uses of funds 3,128 3,673 4,233 4,909 5,687

Book value per share (INR) 24.0 28.2 32.0 37.0 42.7

Free cash flow (INR mn)


Net profit 4,232 4,026 4,465 5,493 6,322

Add : Non cash charge 391 359 408 485 565

Depreciation 376 342 393 468 543

Others 15 16 15 18 22

Gross cash flow 4,623 4,384 4,873 5,979 6,887

Less: Changes in WC (53) 331 565 (686) (491)

Operating cash flow 4,677 4,053 4,308 6,664 7,377

Less: Capex 1,093 453 333 686 630

Free cash flow 3,584 3,600 3,974 5,978 6,747

Cash flow metrics


Operating cash flow 3,974 3,579 4,028 6,664 7,377

Investing cash flow 345 600 (102) (686) (630)

Financing cash flow (3,375) (3,230) (3,980) (4,835) (5,566)

Net cash flow 944 950 (55) 1,143 1,182

Capex (1,093) (453) (333) (686) (630)

Dividends paid (3,182) (3,168) (3,965) (4,817) (5,544)


Consumer Goods

Profitability & efficiency ratios


ROAE (%) 156.1 113.4 109.0 117.1 116.7

ROACE (%) 201.8 154.9 153.0 163.2 163.5

Inventory day 18 22 26 26 26

Debtors days 2 4 6 6 6

Payable days 98 92 82 82 82

Cash conversion cycle (days) (78) (66) (50) (50) (51)

Current ratio 1.1 1.1 1.1 1.1 1.2

Operating ratios


Total asset turnover 7.9 6.7 6.8 7.0 7.0

Fixed asset turnover 9.7 9.1 10.6 10.8 10.9

Equity turnover 7.5 6.4 6.6 6.8 6.9

Valuation parameters


Diluted EPS (INR) 31.1 29.6 32.8 40.4 46.5

Y-o-Y growth (%) 97.6 (4.9) 10.9 23.0 15.1

CEPS (INR) 33.9 32.1 35.7 43.8 50.5

Diluted PE (x) 39.8 41.8 37.7 30.6 26.6

Price/BV (x) 51.6 43.8 38.6 33.5 29.0

EV/Sales (x) 8.1 7.2 6.1 5.1 4.4

EV/EBITDA (x) 33.0 31.9 28.5 22.8 19.3

Dividend yield (%) 1.6 1.6 1.9 2.4 2.7

Peer comparison valuation

Company Market Mcap

Price (INR) (INR bn) FY13E FY14E FY13E FY14E FY13E FY14E

Consumer Goods

Asian Paints 3,932 377 32.8 27.1 21.0 17.3 38.2 38.9

Colgate 1,237 168 30.6 26.6 22.8 19.3 117.1 116.7

Dabur 125 218 28.9 24.2 20.4 17.1 40.7 38.4

Emami 575 87 29.0 23.6 24.0 19.7 40.3 43.7

GSK Consumer* 3,012 127 30.8 26.5 19.9 16.9 33.9 33.0

Godrej Consumer 715 243 31.8 26.4 23.0 19.0 22.9 23.6

Hindustan Unilever 546 1181 35.5 30.8 27.1 23.1 78.5 70.9

ITC 288 2267 29.8 25.4 19.2 16.3 37.5 39.6

Marico 207 133 32.2 26.8 21.3 17.5 30.3 28.5

Nestle* 4,673 451 40.0 32.9 25.4 20.6 74.7 67.4

United Spirits 1,095 143 43.7 31.5 17.0 14.8 6.6 8.6

Consumer Goods - Mean 33.2 27.4 21.9 18.3 47.3 46.3

Consumer Goods - Mean (market cap wtd average) 32.6 27.6 22.0 18.5 50.5 49.2

Consumer Goods - Mean (ex-Nestle) 32.5x 26.9x 21.6x 18.1x 44.6 44.2

* CY numbers Source: Edelweiss research

P/E (x) EV/EBITDA(x) ROE (%)


Company Absolute

reco

Relative

reco

Relative

risk

Company Absolute

reco

Relative

reco

Relative

Risk

Asian Paints BUY SP M Colgate HOLD SP M

Dabur BUY SO M Emami BUY SP H

GlaxoSmithKline Consumer Healthcare BUY SP M Godrej Consumer BUY SO H

Hindustan Unilever HOLD SP L ITC BUY SO L

Marico BUY SO M Nestle Ltd HOLD SP L

United Spirits HOLD SU H

RATING & INTERPRETATION

ABSOLUTE RATING

Ratings Expected absolute returns over 12 months

Buy More than 15%

Hold Between 15% and - 5%

Reduce Less than -5%

RELATIVE RETURNS RATING

Ratings Criteria

Sector Outperformer (SO) Stock return > 1.25 x Sector return

Sector Performer (SP) Stock return > 0.75 x Sector return

Stock return < 1.25 x Sector return

Sector Underperformer (SU) Stock return < 0.75 x Sector return

Sector return is market cap weighted average return for the coverage universe

within the sector

RELATIVE RISK RATING

Ratings Criteria

Low (L) Bottom 1/3rd percentile in the sector

Medium (M) Middle 1/3rd percentile in the sector

High (H) Top 1/3rd percentile in the sector

Risk ratings are based on Edelweiss risk model

SECTOR RATING

Ratings Criteria

Overweight (OW) Sector return > 1.25 x Nifty return

Equalweight (EW) Sector return > 0.75 x Nifty return

Sector return < 1.25 x Nifty return

Underweight (UW) Sector return < 0.75 x Nifty return


Consumer Goods

Edelweiss Securities Limited, Edelweiss House, off C.S.T. Road, Kalina, Mumbai – 400 098.

Board: (91-22) 4009 4400, Email: [email protected]

Vikas Khemani Head Institutional Equities [email protected] +91 22 2286 4206

Nischal Maheshwari Co-Head Institutional Equities & Head Research [email protected] +91 22 4063 5476

Nirav Sheth Head Sales [email protected] +91 22 4040 7499

Coverage group(s) of stocks by primary analyst(s): Consumer Goods

Asian Paints, Colgate, Dabur, Godrej Consumer , Emami, Hindustan Unilever, ITC, Marico, Nestle Ltd, GlaxoSmithKline Consumer Healthcare, United Spirits

Distribution of Ratings / Market Cap

Edelweiss Research Coverage Universe

Rating Distribution* 113 53 19 186

* 1 stocks under review

Market Cap (INR) 114 58 14

Date Company Title Price (INR) Recos

Recent Research

29-Oct-12 Asian

Paints

Volumes recover; margins to

follow; Result Update

3,923 Buy

26-Oct-12 Hindustan

Unilever

Core story intact; wait for

better entry point;

Result Update

552 Hold

26-Oct-12 Dabur Healthy and Juicy;

Result Update

130 Buy

> 50bn Between 10bn and 50 bn < 10bn

Buy Hold Reduce Total

Rating Interpretation

Buy appreciate more than 15% over a 12-month period

Hold appreciate up to 15% over a 12-month period

Reduce depreciate more than 5% over a 12-month period

Rating Expected to


Colgate Palmolive

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