24 January 2012
3QFY12 Results Update | Sector: Consumer
BSE SENSEX S&P CNX
CMP: INR985 TP: INR823 Sell
Bloomberg CLGT IN
Equity Shares (m) 136.0
52-Week Range (INR) 1,084/783
1,6,12 Rel. Perf. (%) -10/10/28
M.Cap. (INR b) 134.0
M.Cap. (USD B) 2.7
Colgate Palmolive (CLGT) posted 74% YoY growth in 3QFY12 PAT to INR1.16b v/s our estimate of INR1.01b.
Toothpaste volume growth was robust at 15%. Market share during the period December 2010-November
2011 was 52.5%. Overall volume growth was 13% for the second consecutive quarter.
EBITDA margin expanded 550bp YoY as OHM (Oral Health Month) got pushed from 3Q to 4Q, resulting in 550bp
decline in ad spend. 520bp lower tax rate also boosted profitability.
CLGT is setting up a new toothpaste facility at Sanand in Gujarat, for which it has paid lease charges of
INR426m for land. We estimate the capital cost at INR2b spread over FY12 and FY13. The company has sufficient
capacity to maintain its growth trajectory till the new unit comes on stream.
Competitive intensity in oral care is a major challenge for CLGT in the medium term; we note that it has been
losing toothbrush market share to P&G's Oral-B in recent months. CLGT is also facing intense competition
from Glaxo's Sensodyne in the super premium segment. Media reports indicate that P&G has started pilot
testing of toothpaste in India, which could result in its product being launched in FY13 itself. We expect sales
growth and profit margins to take a hit once P&G launches its toothpaste in India.
We are raising our earnings estimates by 1%, which captures the net impact of lower interest income due to
capex and tax rate 100-150bp lower than the earlier estimate. We expect 12.5% PAT CAGR over FY11-13, led
largely by volume growth in oral care.
The stock trades at 31x FY12E and 26x FY13E EPS. Current valuations build in structural positives and are at 25%
premium to the 5-year average P/E multiple. Maintain Sell.
Amnish Aggarwal (AmnishAggarwal@MotilalOswal.com); Tel:+9122 39825404
Colgate Palmolive's 3QFY12 PAT grew 74% YoY to INR1.16b (est INR1.01b). Key
Toothpaste volume growth at 15% remained robust; market share during Dec10-
Nov11 is 52.5%, having declined 90bp as compared to same period last year. Overall
volume growth was 13% for 2nd consecutive quarter.
EBIDTA margin expanded 550bp YoY as OHM (Oral Health Month) got pushed from
3Q to 4Q resulting in 550bp decline in ad spend. 520bp lower tax rate also boosted
CLGT launched Colgate 360 sonic power battery operated toothbrush which marks
its entry in the premium segment of battery toothbrushes in India.
CLGT is setting up a new toothpaste facility at Sanand in Gujarat for which it has
paid lease charges of INR426m for land. We estimate the capital cost at INR2b
spread over FY12 and FY13. The company has sufficient capacity to maintain its
growth trajectory till new unit comes on stream.
Competitive intensity in the oral care is a major challenge for CLGT in the medium
term; we note that it has been losing toothbrush market share to P&G's Oral-B in
recent months, and has hence entered the premium segment. CLGT is also facing
intense competition from Glaxo's Sensodyne in the super premium segment.
Media reports indicate that P&G has started pilot testing of toothpaste in India
which could result in product being launched in FY13 itself. We expect sales growth
and profit margins to take a hit once P&G launches its toothpaste in India. We note
that P&G has launched Oral-B toothpaste in Nigeria, Ghana, UK, etc in CY11.
We are raising our estimates by 1% which captures net impact of lower interest
income due to capex and lower tax rate by 100-150bp over earlier estimates. We
expect 12.5% PAT CAGR over FY11-13, led largely by volume growth in oral care.
The stock trades at 31x FY12 and 26x FY13 EPS, which builds in structural positives
and is at 25% premium to its 5-year average P/E multiple. Maintain Sell.
3QFY12 results: PAT up 74% due to 550bp lower ad spends and 520bp lower
Net sales grew 20% to INR6.7b (est INR6.5b) led by volume growth of 13% (15% in
toothpastes). Oral care category grew 20% in value terms for the quarter.
Gross margin declined 90bp YoY to 60.4% (est 60.5%, 59.9% in 2Q) as input costs
remained high. Gross margin expansion QoQ was enabled by 4-5% price increase
in the past couple of quarters and improved sales mix.
Ad spends declined 10.9% YoY to INR1075m (-550bp) which enabled 550bp EBIDTA
margin expansion to 21.6%. We note that decline in ad spends is mainly due to
OHM (Oral Health Month) being in Dec-Jan this year as against in 3QFY11. This will
result in higher A&P in 4QFY12.
EBITDA grew 60% YoY to INR1.5b (est INR1.4b); 520bp decline in tax rate enabled
74% growth in Adj PAT to INR1.16b (est INR1.01b).
24 January 2011 2
Overall volume growth of 13% ... … led by a 15% volume growth in toothpastes
Overal l Vol ume growth (%) 18
16.0 15 15
14 15 14
13.0 13.0 12
11 14 14
11.5 12.0 12.0 13
13.0 11.0 13.0 13.0 11
12.0 12.0 11
Toothpaste volume growth strong at 15%; Shifting of Oral Health Month
Volume growth in toothpastes remains strong at 15% led by aggressive investments
across brands. Volume market share during Dec10-Nov11 is 52.5%, down 90bp
compared to same period last year. Mouthwash market share increased to 27.4%
(Dec 10-Nov11) from 17.4% for the corresponding period. However, recent reports
indicate that CLGT has been losing market share to P&G's Oral-B in toothbrush
segment in meaningful manner, 2Q market share had declined 370bp QoQ to
CLGT continues to invest behind new launches like Colgate Sensitive Pro-relief
and other brands like CDC, Total, Max Fresh and Active Salt.
CLGT launched Colgate 360 sonic power battery operated toothbrush which marks
its entry in the premium segment of battery toothbrushes in India. It has also
launched Colgate Zigzag Anti-germ toothbrush. CLGT strengthened its kids
portfolio with the launch of Colgate Barbie and Spiderman toothpaste and
Competitive intensity in the oral care is major challenge for CLGT in the medium
term. CLGT is facing intense competition from Glaxo's Sensodyne in the super
premium segment of toothpaste and we expect Glaxo to expand its product
offering with more variants and even launch of its Acquafresh toothpaste over a
period of time. Media reports indicate that P&G has started pilot testing of
toothpaste in India which could result in product being launched in FY13 itself. We
believe that entry of Glaxo and P&G will result in increased ad spends and price
based competition in the medium term which can impact growth and profitability.
We note that P&G has launched Oral-B toothpaste in Nigeria, Ghana, UK, etc in
24 January 2011 3
Gross margins improve 50bp QoQ… EBITDA margins expand 550bp as ad spends decline sharply
Gros s Ma rgi n (%) Ad Spend (% of Sa l es ) EBITDA Margi n (%)
25.3 23.7 24.0
20.9 22.0 22.8 21.520.9 21.6
57 16.9 17.4 16.1
56 56 60 15.4 15.3 16.1 13.1 14.3 16.1 13.8 16.2
59 60 12.5
Premium valuations factor in structural positives; maintain sell with a target
price of INR823, 16% downside
Colgate has seen sharp re-rating in the past few years led by (1) sustained double
digit volume growth, (2) EBIDTA margin expansion of 860bp over FY07-11, and (3)
2x increase in income from shared services to parent and decline in tax rate to
We believe that the stock at 30.8x FY12 EPS of Rs32 and 26.4x FY13 EPS of Rs37.4
factors in positives like a strong brand franchise, steady profit growth and growth
opportunity in oral care market in India. Risks ahead could be 1) likelihood of
structural correction in profit margins in event of P&G entering Indian toothpaste
market and Glaxo entering mass segment in toothpaste, (2) gradual increase in
tax rate from 22% to 30%, and (3) 12.5% PAT CAGR over FY11-13.
We value the stock at 22x FY13 earnings with a target price of INR823, 16% downside.
24 January 2011 4
Colgate Palmolive: an investment profile
Company description Recent developments
Colgate Palmolive (CLGT) is a market leader in the CLGT affected a price increase of 4-5% on select
toothpaste segment with a market share of ~50% in India. brands/SKUs.
Oral care is one of the most under-penetrated segments of CLGT amalgamated its subsidiary Professional Oral
the FMCG market with penetration of ~31% in toothpowder Care Products Private Ltd and CC Healthcare, another
and ~57% in toothpaste. CLGT invested INR700m in a subsidiary, has filed a petition for amalgamation with
toothpaste facility in Baddi, Himachal Pradesh, which will the company with effect from 1 April 2009.
accrue fiscal benefits until FY15.
Valuation and view
Key investment arguments Our EPS estimates remain largely unchanged at INR32
CLGT maintains its leadership position in the oral-care in FY12 and INR37.4 in FY13.
market. It has maintained its market share over its main The stock trades at 30.8x FY12E EPS of INR32 and
competitors. 26.4x FY13E EPS of INR37.4. Maintain Sell.
Volume growth continues to be strong with toothpaste
growing in strong double digits, led by increasing
conversions from toothpowder and improved
We have a cautious view on the sector due to pressure
on consumer wallets.
Companies with low competitive pressures and broad
Key investment risks product portfolios will be able to better withstand a
P&G's entry in the oral-care market with its Crest/Oral slowdown in a segment.
B brands will intensify competition. Long-term prospects are bright, given rising income
A slowdown in toothpaste volume growth could affect levels and low penetration.
CLGT as it is still a single-segment company.
Comparative valuations EPS: MOSL forecast v/s Consensus (INR)
Colgate HLL Nestle MOSL Consensus Variation
P/E (x) FY12E 30.8 33.6 38.9 Forecast Forecast (%)
FY13E 26.4 29.0 32.9 FY12 32.0 32.3 -0.8
EV/EBITDA (x) FY12E 22.6 25.1 25.6 FY13 37.4 37.4 0.1
FY13E 18.9 21.4 21.0
EV/Sales (x) FY12E 4.9 3.6 5.2 Target price and recommendation
FY13E 4.2 3.2 4.3 Current Target Upside Reco.
P/BV (x) FY12E 28.9 25.7 31.4 Price (INR) Price (INR) (%)
FY13E 24.0 20.8 23.1 985 823 -16.4 Sell
Stock performance (1 year)
Col ga te Sens ex - Reba s ed
Shareholding Pattern (%) 975
Dec-11 Sep-11 Dec-10
Promoter 51.0 51.0 51.0
Domestic Inst 7.3 7.3 7.0
Foreign 20.0 19.6 17.7
Ja n-11 Apr-11 Jul -11 Oct-11 Ja n-12
Others 21.8 22.1 24.3
24 January 2011 5
Financials and Valuation
24 January 2011 6
N O T E S
24 January 2011 7
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