Colgate-Poor earnings quality. :: Kotak Sec

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Colgate-Palmolive (India) (CLGT)
Consumer products
Poor earnings quality. Volume growth of 13% is in line with expectations. 2QFY11 cost line
items are not comparable as Colpal merged subsidiaries engaged in contract manufacturing with
itself. Significant cut in adspends (decline of 4%) despite the extended ‘Oral Health Month’
program raises questions as to whether Colgate is likely phasing out adspends to tackle the
expected P&G entry in Oralcare. Stock trades at 23XFY2012E for estimated 11% earnings CAGR
over FY2010-12E, retain SELL.


Results quality disappoints
Colgate reported sales of Rs5.5 bn (+13%, KIE estimate Rs5.7 bn), EBITDA of Rs1.3 bn (+17%,
KIE estimate of Rs1.5 bn) and PAT of Rs1 bn (+12%, KIE estimate of Rs1.1 bn).
􀁠 Volume growth was at 13% with toothpaste growing at 12% and toothbrush reporting
volume growth of 24% on yoy basis.
􀁠 The cost line items are not comparable on yoy basis as the company has merged subsidiaries
engaged in contract manufacturing with itself.
􀁠 We are surprised at the extent of savings in EBITDA due to merger of entities operating as
contract manufacturing facilities. We would seek clarity from management regarding the
seemingly material difference in cost structure of own operations and contract manufacturing
facilities.

P&G’s big bang entry with Oral B toothpaste likely in 4QFY11E
Industry sources indicate that P&G is likely to launch Oral B toothpaste in 4QFY11E. Stability tests
are currently going on and the company is likely to complete trial runs by 3QFY11E.
We continue to believe that the threat of P&G’s entry into toothpaste category in India, which can
likely result in disruptive competition for Colgate, is real. Oral care contributes ~6% (US$5 bn) of
P&G’s global sales with toothpaste contributing ~30% and toothbrushes ~45%.
In the key market of US, P&G has mostly integrated ‘Crest’ and ‘Oral-B’ through the co-branding
route (wherever applicable). Industry sources suggest that (1) P&G’s current focus (in its global oral
care portfolio) is optimization of market opportunity between its two leading brands—‘Oral-B’ and
‘Crest’ and (2) P&G will likely expand its toothpaste offering into countries where Oral-B is strong.