COLGATE-PALMOLIVE:Continues to shine; P&G the only risk::Edelweiss

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􀂃 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). 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%; 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% (January-
September 2009) to 16.3% (January-September 2010). The company posted
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 82bps Y-o-Y, to 20.3%, largely driven by 270bps decline in raw
material costs. This was, however, offset by Y-o-Y surge in staff cost by 201bps
and other expenses by 250bps.
􀂃 A&P spend declines, reiterating formidable brand equity
Colgate’s ad spend in the quarter was efficiently managed; it declined 263bps Yo-
Y, to 14.3% of sales. This is in spite of the main competitor, HUL, spending
heavily on ads - another testimony of Colgate’s strong brand equity.
􀂃 Tax rates ballooned, as expected
The manufacturing plant at Baddi, which meets ~50% of Colgate’s needs,
enjoyed 100% tax exemption for five years. The tax holiday ended in April 2010,
hence, tax rates rose 268bps Y-o-Y, to 22.1% in Q2FY11.
􀂃 Outlook and valuations: Robust; maintain ‘HOLD’
Colgate’s brand equity and distribution remain huge advantages. The company
has managed to maintain 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 ~100–200bps, 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 ‘HOLD’
recommendation on the stock. On relative basis the stock is rated ‘Sector
Underperformer’.