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Colgate-Palmolive India (COLG.BO, Rs816, UW, PT Rs700)
Why are we downgrading to UW?
• We see a potential increase in competitive pressures.
• We believe the oral care segment has strong long-term
volume growth prospects in India because of its
under-penetration relative to other emerging markets. An
increase in competitive intensity, in this segment, is
inevitable, in our view.
• The market is underestimating the potential increase in
competition from HUL and Dabur, particularly in the low
price point segment. P&G also has the potential to enter
the oral care segment.
• Colgate might also start to experience cost inflation in
coming quarters as prices of key inputs have increased in
the past three months.
• A combination of higher comps for operating profit margins
and increased tax rate (expiry of tax breaks) will likely
constrain earnings progression, in our view.
Potential to Face Significant Rise in Competitive
Pressures
We believe the oral care segment has strong long-term
volume growth prospects in India because of its
under-penetration relative to other emerging markets. An
increase in competitive intensity, in this segment, is inevitable,
in our view. We downgrade Colgate to UW (from EW), given
our belief that:
1) Markets are underestimating the potential increase in
competition from HUL and Dabur, particularly in the low
price point segment. P&G also has the potential to enter
the oral care segment.
2) Colgate might also start to experience cost inflation in
coming quarters as prices of key inputs have increased in
the past 3 months and
3) A combination of higher comps for operating profit
margins and increased tax rate (expiry of Baddi
manufacturing tax breaks) will likely constrain earnings
progression, in our view.
We observe that when P&G upped the ante in Latin America,
Colgate initially managed to support volume growth through
judicious pricing action. However, over the past few quarters,
Colgate has been unable to revive volume growth in the
region despite benign pricing. As a result, organic sales
growth in Colgate’s LatAm division (~50% of which is oral
care) has decelerated sharply. P&G’s healthcare division (of
which 1/3rd is oral care) margins in the last few quarters have
been affected by higher competitive intensity, in our view.
Margins have declined by 250bp over the past four quarters
for the division.
F3Q11: Strengthening Brand Equity in Response to
Rising Competitive Intensity: Colgate reported revenue,
operating profit and net profit growth of 14%, (-)23% and
(-)37% respectively for Q3F11 which compares with our
expectation of 13.5%, 8% and (-)7% respectively. Revenue
growth was driven by 13% volume growth in toothpaste and
overall volume growth of 12% for the quarter. The key
highlight of the result was 60% YoY increase in ad spends –
21.6% of sales for the quarter.
Sharp Increase in ad spending: Contrary to our expectation
of input cost pressures this quarter, gross margins were up
410bps. OPM, however declined by 800bps during the quarter,
higher than our expectation of 110bps decline, driven by
630bps increase in ad spending. Interestingly ad spends in
Q3F11 were the highest since Sep-01, the period when
Colgate was defending its market share against HUL.
According to management, this is largely on account of
phased ad spending - they made substantial investments in
brand building activities to strengthen market leadership.
Management expects a 16% ratio of ad spending to sales for
F11.
Market share at 53.4% by volume: Market share in
toothpastes rose to 53.4% for Jan-Nov’10 (it was 52.3%
during Jan-Nov’09). However, sequentially, Colgate largely
maintained market share in toothpastes. For toothbrushes,
volumes grew 24% in Q3 & market share for Jan-Sept period
improved to 40.9% as against 39.7% in Q3F10. Colgate
continues to gain share in the mouthwash segment, with Plax
volume market share at 17.3% (Jan-Nov ’10) vs. 16.3% as at
Q2F11.
Investment Thesis
• We believe the oral care segment has
strong volume growth potential in the
long term and that Colgate is very well
positioned to capitalize on this nascent
opportunity.
• We believe this also makes an
increase in competitive intensity in this
segment inevitable
• Markets are not fully factoring in
slowdown in earnings growth due to a
rise in the tax rate in F2011 and
potential sharp increase in input costs.
• 22% valuation premium to group not
warranted considering the potential
rise in risks.
Key Value Drivers
• Growth in penetration of toothpastes,
driven by rising incomes and improved
demographics.
• Increase/decrease in competitive
pressures, thereby affecting margins.
• Deterioration/improvement in product
mix.
Potential Catalysts
• Increase in advertising-to-sales ratio,
indicating increase in competitive
pressures.
• Increase in input costs due to increase
in inflationary pressures.
• Decrease in market share due to rise
in competitive pressures from existing
players and potential new players.
• Deterioration in product mix within the
toothpaste business.
Key Risks
1. Continuous market share gains.
2. Competitive intensity.
3. Sharp reduction in advertising to
sales ratio.
4. Input cost headwinds.
5. Deterioration in product mix.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Colgate-Palmolive India (COLG.BO, Rs816, UW, PT Rs700)
Why are we downgrading to UW?
• We see a potential increase in competitive pressures.
• We believe the oral care segment has strong long-term
volume growth prospects in India because of its
under-penetration relative to other emerging markets. An
increase in competitive intensity, in this segment, is
inevitable, in our view.
• The market is underestimating the potential increase in
competition from HUL and Dabur, particularly in the low
price point segment. P&G also has the potential to enter
the oral care segment.
• Colgate might also start to experience cost inflation in
coming quarters as prices of key inputs have increased in
the past three months.
• A combination of higher comps for operating profit margins
and increased tax rate (expiry of tax breaks) will likely
constrain earnings progression, in our view.
Potential to Face Significant Rise in Competitive
Pressures
We believe the oral care segment has strong long-term
volume growth prospects in India because of its
under-penetration relative to other emerging markets. An
increase in competitive intensity, in this segment, is inevitable,
in our view. We downgrade Colgate to UW (from EW), given
our belief that:
1) Markets are underestimating the potential increase in
competition from HUL and Dabur, particularly in the low
price point segment. P&G also has the potential to enter
the oral care segment.
2) Colgate might also start to experience cost inflation in
coming quarters as prices of key inputs have increased in
the past 3 months and
3) A combination of higher comps for operating profit
margins and increased tax rate (expiry of Baddi
manufacturing tax breaks) will likely constrain earnings
progression, in our view.
We observe that when P&G upped the ante in Latin America,
Colgate initially managed to support volume growth through
judicious pricing action. However, over the past few quarters,
Colgate has been unable to revive volume growth in the
region despite benign pricing. As a result, organic sales
growth in Colgate’s LatAm division (~50% of which is oral
care) has decelerated sharply. P&G’s healthcare division (of
which 1/3rd is oral care) margins in the last few quarters have
been affected by higher competitive intensity, in our view.
Margins have declined by 250bp over the past four quarters
for the division.
F3Q11: Strengthening Brand Equity in Response to
Rising Competitive Intensity: Colgate reported revenue,
operating profit and net profit growth of 14%, (-)23% and
(-)37% respectively for Q3F11 which compares with our
expectation of 13.5%, 8% and (-)7% respectively. Revenue
growth was driven by 13% volume growth in toothpaste and
overall volume growth of 12% for the quarter. The key
highlight of the result was 60% YoY increase in ad spends –
21.6% of sales for the quarter.
Sharp Increase in ad spending: Contrary to our expectation
of input cost pressures this quarter, gross margins were up
410bps. OPM, however declined by 800bps during the quarter,
higher than our expectation of 110bps decline, driven by
630bps increase in ad spending. Interestingly ad spends in
Q3F11 were the highest since Sep-01, the period when
Colgate was defending its market share against HUL.
According to management, this is largely on account of
phased ad spending - they made substantial investments in
brand building activities to strengthen market leadership.
Management expects a 16% ratio of ad spending to sales for
F11.
Market share at 53.4% by volume: Market share in
toothpastes rose to 53.4% for Jan-Nov’10 (it was 52.3%
during Jan-Nov’09). However, sequentially, Colgate largely
maintained market share in toothpastes. For toothbrushes,
volumes grew 24% in Q3 & market share for Jan-Sept period
improved to 40.9% as against 39.7% in Q3F10. Colgate
continues to gain share in the mouthwash segment, with Plax
volume market share at 17.3% (Jan-Nov ’10) vs. 16.3% as at
Q2F11.
Investment Thesis
• We believe the oral care segment has
strong volume growth potential in the
long term and that Colgate is very well
positioned to capitalize on this nascent
opportunity.
• We believe this also makes an
increase in competitive intensity in this
segment inevitable
• Markets are not fully factoring in
slowdown in earnings growth due to a
rise in the tax rate in F2011 and
potential sharp increase in input costs.
• 22% valuation premium to group not
warranted considering the potential
rise in risks.
Key Value Drivers
• Growth in penetration of toothpastes,
driven by rising incomes and improved
demographics.
• Increase/decrease in competitive
pressures, thereby affecting margins.
• Deterioration/improvement in product
mix.
Potential Catalysts
• Increase in advertising-to-sales ratio,
indicating increase in competitive
pressures.
• Increase in input costs due to increase
in inflationary pressures.
• Decrease in market share due to rise
in competitive pressures from existing
players and potential new players.
• Deterioration in product mix within the
toothpaste business.
Key Risks
1. Continuous market share gains.
2. Competitive intensity.
3. Sharp reduction in advertising to
sales ratio.
4. Input cost headwinds.
5. Deterioration in product mix.
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