Colgate-Palmolive: Q2FY11 results inline:: Nomura

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􀁾 Action
We are moving our target price higher as we roll forward by six months. Q2FY11
results were largely in line with expectations, although competitive intensity
continues to remain high in the core oral care category. With stock trading at 24.2x
FY12F EPS, and the EPS growth outlook muted, we maintain our REDUCE call.
􀁡Catalysts
Significant reduction in competitive intensity in the oral care category could lead to
earnings upgrades, but we see that as unlikely in the medium term.
Anchor themes
Colgate-Palmolive remains the incumbent market leader in the oral care category in
India with more than 50% share across various segments. Company has strong
brand equity, but with competition expected to intensify going forward, we would
prefer other names in FMCG at current levels.






Q2FY11 results inline
􀁣 Q2FY11 results inline
Colgate’s Q2FY11 numbers were largely in line with our expectations
at the top line, with 13.2% revenue growth y-y, but marginally weaker
at the EBITDA line, as employee costs and other expenditures were
higher than our estimates.
􀁤 Competitive intensity continues to remain high
Competitive intensity in the core oral care category continues to
remain high. P&G’s entry into the toothpaste category later this year
could intensity competition in the category.
􀁥 Increasing TP on account of roll forward
We have now also incorporated audited FY10 numbers, which were
ahead of our earlier estimates. The earnings change in FY11 and
FY12 is largely on account of the higher FY10 base. We are also
rolling forward our target price by six months, which along with
increased earnings, leads to a 14% change in PT. Our valuation
methodology remains unchanged, at 22x one year forward earnings.
􀁦 Maintain REDUCE
With the company already operating at peak margins, we see
downside risk to margins over the next two years. Margin pressure
could be more intense than we are currently building in if P&G’s entry
sparks off a price war, as was the case in the laundry segment a few
months back. Valuation at 24.2x FY12F also remains unsupportive.
Reiterate REDUCE.