Colgate: Inline Q2FY11 - Healthy volume growth trends :: JPMorgan

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Colgate-Palmolive (India) Limited
Neutral
COLG.BO, CLGT IN
Inline Q2FY11 - Healthy volume growth trends maintained



• Q2FY11 earnings performance. Colgate reported 13%, 18% and 12% y/y
sales, EBITDA and earnings growth for Q2FY11. While sales growth was in
line with our expectations, earnings growth was impacted to some extent by
higher employee and other expenses as they include 6 month financials for CC
healthcare (earlier 75% subsidiary and now merged). Also employee costs
include one time provision related to actuarial valuation for gratuity.
• Healthy volume growth momentum maintained. Toothpaste vol growth was
strong at 12% during Q2FY11 even on a high base of 18% in Q2FY10. Clearly
Colgate’s efforts involving a combination of powerful marketing strategies,
significant step-up in differentiated consumption-building programs and rural
distribution reach are leading to such healthy vol growth trends. Overall volume
growth during the quarter was 13% with toothbrushes registering 24% vol
growth. Net sales value growth was also 13% implying that price/mix growth
was negligible on account of unfavorable product mix shift. Management noted
that rural market growth is 150-200bps higher than urban growth. Market share
gains continue with volume share during Jan-Sep’10 at 53.3% (+130bp y/y).
• A&P spends dip 4% y/y, COGS inflation setting in. Contrary to our
expectations, A&P spends were low during the quarter. This shows that Colgate
has been able to gain market share despite spending lower than the competition
on a relative basis. It is important to note that Colgate’s yearly initiative of Oral
Health Month is currently underway (Sep-Oct months) and we believe
marketing spends could likely pick up in Dec’10 qtr. During 1HFY11
A&P/Sales for Colgate stood at 13.7% (-100bp y/y). Management noted that
raw material cost pressures (particularly crude related/packaging costs and
flavors) have started to inch up sequentially.
• Key change in company’s strategy in recent months has been increased
focus on premiumisation and uptrading consumers towards premium oral
hygiene products like Colgate Total, Colgate Max Fresh, Colgate Sensitive in
toothpastes and Colgate Plax in Mouthwash segment (vol share in mouthwash
increased to 16.3% during Jan-Sep'10 vs 6.4% a year ago).
• Our view. In our view, Colgate will be able to maintain volume growth of 10-
12% over FY11-12E given its strong focus on scaling up distribution in
underpenetrated rural markets. Its strategy on growing the premium portfolio
bodes well for mix improvement (though results will be visible only over longer
term). Current valuations at 27x FY11E and 23x FY12E appear fair to us and we
maintain our Neutral stance.