Colgate-Palmolive India (CLGT, Buy) RESULT UPDATE :: Edelweiss

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Colgate-Palmolive India (CLGT, Buy)
􀂄 Results largely in line with expectations; gains market share
Colgate-Palmolive India’s (Colgate) Q2FY11 revenues jumped 13% Y-o-Y to INR 5.52 bn
(in line with our expectation of INR 5.5 bn) and PAT increased ~12% Y-o-Y to INR 1 bn
(marginally below our estimate of INR 1.06 bn). Toothpaste market share (volume)
increased 130bps Y-o- Y to 53.3% and that for toothbrush jumped 160bps to 40.5%,
while for toothpowder it declined 60bps to 48.0% for January-September 2010. In the
emerging mouthwash category, Plax mouthwash has increased its volume market share
from 6.4% (Jan-Sept 09) to 16.3% (Jan-Sept 10). The company posted a volume growth
of 13% Y-o-Y led by steady 12% growth in the toothpaste category. Toothbrush volumes
grew 24% Y-o-Y.
􀂄 Decline in raw material costs boosts EBITDA
While the company’s EBITDA rose 18.0% Y-o-Y to INR 1,122 mn, EBITDA margin
improved 82 bps Y-o-Y to 20.3%, largely driven by 270bps decline in raw material costs.
This was by surge in staff cost by 201 bps and other expenses rose 250 bps Y-o-Y to
15.8% of net sales.
􀂄 A&P spend decline, reiterating formidable brand equity
Colgate’s ad spends during the quarter were efficiently managed and declined 263 bps Yo-
Y to 14.3% of sales. This, in spite of main competitor HUL spending heavily on ads and
hiring. Another testimony of strong brand equity of Colgate.
􀂄 Tax rates ballooned as expected
The manufacturing plant at Baddi, which meets nearly 50% of Colgate’s needs, enjoyed
100% tax exemption for five years. The tax holiday ended in April 2010. Hence, tax rates
rose 268 bps Y-o-Y to 22.1% in Q2FY11.
􀂄 Outlook and valuations: Robust; maintain ‘HOLD’
Colgate’s brand equity and distribution remains a huge advantage. The company has
managed to maintain a revenue growth rate of 13% Y-o-Y, same as in Q4FY10 (largely
comparable as amalgamation impact was reflected even in Q4FY10). Tax rates are
expected to rise ~100–200 bps going ahead. P&G is likely to enter the oral care market
in H2FY11, which will put additional pressure on Colgate. Also, HUL has upped the ante
in terms of ad spends. We maintain our ‘HOLD’ recommendation on the stock. On
relative return basis, the stock is rated ‘Sector Underperformer’