Buy Colgate Palmolive:: India Revenue growth intact, though higher ad spend; Anand Rathi

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Colgate Palmolive, India
Revenue growth intact, though higher ad spend; Buy
Despite it seeing a dismal 3QFY11, we are upbeat on Colgate’s
long-term growth prospects. As it continues to gain market share
across segments, we expect it to report 14% earnings CAGR over
FY10-13e. We maintain Buy on the stock.

 Volume growth momentum intact. Colgate saw 13% revenue
growth in 3QFY11; volume grew 12% yoy. Toothbrushes
reported 24% yoy volume growth. The company gained 10bps
market share in toothpastes yoy, and 110bps in toothbrushes. It
recently hiked prices, by 4-6%, on select SKUs and the effect
would be seen in 4QFY11.
 Lower EBITDA margin; higher taxes. EBITDA margin slid
720bps on increase in ad spend (as a percentage of net sales). The
tax rate has risen, as the 5-year tax exemption at Baddi is
exhausted. The higher income tax rate saw net profit fall 37% yoy.
 Higher ad spend. With P&G’s expected entry into oral care in
4QFY11, Colgate has increased ad spend as a precautionary step.
Also, higher focus on Colgate Total, Sensitive and Plax is resulting
in higher ad spend. We believe increase in coverage of ‘oral care
month’ by Colgate has also led to the higher ad spend.
 Valuation and risks. We value the stock at a price target of
`1,020, based on target PE of 25x FY12e earnings. Our target PE
is at 50% premium to the 12-month forward Nifty PE (the 10-
year average premium is 43%). Key risks: higher raw material
prices and competition