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Colgate Palmolive (India) (COLG.BO)
Sell: 3QFY11 Profits Decline as Ad Spends Soar
Steady volumes… — Revenue growth of ~13% Y/Y to Rs5.8bn was a tad lower
than our expectations, driven by underlying volume growth of ~12% Y/Y.
Toothpaste & toothbrushes volume growth of 13% & 24% Y/Y respectively
remained steady. Market share trends were encouraging, especially in toothpaste
(+90bps Y/Y to ~53.4% YTD CY10). Volume shares in toothbrushes and
mouthwash increased YoY to 40.9% and 17.3% respectively, while toothpowder
was slightly lower at ~47.3%.
... but at a cost to margins — 23% Y/Y EBITDA decline to Rs931m disappointed
as margins contracted 760bps Y/Y & 660bps QoQ to ~16.1%, meaningfully below
forecasts. The main reason for the earnings miss was the substantially higher ad
spends in 3Q (+60% Y/Y). While we did expect 3Q ad spends to rise (heightened
competitive intensity and timing of the Oral Health Month / festive season), the
magnitude was a negative surprise. We note that the reported gross margins
(62.5%, +~360bps Y/Y) & SGA (+48% Y/Y) aren’t comparable with the previous
year, given distortions arising from the amalgamation of the contract
manufacturers. PAT declined 43% Y/Y to Rs662m.
Paring estimates & target price — Our TP is revised to Rs800 from Rs870
(based on 24x FY12E) as we cut our FY11-13E EPS est. by 3-15%, tweaking our
cost assumptions (GMs, advertising and SG&A) – in line with recent trends.
Maintain Sell — Going forward, profit growth is likely to be impacted by a slight
moderation in revenue growth and increasing competition from Hindustan
Unilever, Dabur & possibly P&G. We don’t expect ad to sales ratio to come off as
mgmt attempts to maintain share of voice with customers. Colgate's relative PE to
the market is currently at ~1.7x, is at the higher end of the last five-year range
(0.8x-1.9x). Risk reward appears unfavorable at this juncture, in our view.
Upside risks — a) Ad expenses lower than forecast going forward, and b) further
margin expansion, driven by amalgamation of contract manufacturers.
Cutting Earnings Estimates
Post the disappointing results, we cut our FY11-13E EPS estimates by 3-15%,
tweaking our cost assumptions (GMs, advertising and SG&A).
There are marginal changes (-1%) to our revenue (realization) growth
estimates going forward – we expect growth rates to slightly moderate going
forward – estimate 13% net revenue CAGR over FY10-13E (v/s 15% over
FY07-10).
Our EBITDA margins have been pared by 340bps to 20.1% for FY11E,
driven by higher brand building spends and other expenses. Our assumption
for advertising to revenues in FY11E and FY12E is ~16.3%, up from ~15.3%
in FY10. We also expect some gross margin contraction going forward.
We have marginally tweaked our tax rates in line with management
guidance. Post expiry of the tax shield at the Baddi facility (down to 30%
from 100%), the effective tax rates have gone up ~24-25% from FY11E
onwards.
We reduce EPS estimates by 15% for FY11E, and also by 3-8% for FY12-
13E. Our DPS forecasts have been cut, as we maintain the dividend payout
ratio at ~65%, in-line with FY10.
Reiterate Sell; Target Price of Rs800
Given the cut in earnings, our target price is revised to Rs800 (Rs870 earlier),
based on 24x March-2012E earnings. We forecast ~8% EPS CAGR over
FY10-13E. The stock trades at ~26x one yr forward P/E, higher than its trailing
5 yr average of 21x. From a relative perspective too, Colgate’s PE to the broad
market is currently at 1.7x, i.e. at the higher end of the five-year range of 0.8x-
1.9x. We think that risk reward at current levels is unfavorable.
Colgate Palmolive (India)
Valuation
We use a P/E based methodology to value Colgate India because of its steady
growth profile. Our target price of Rs800 is based on 24x Mar12E earnings. Our
target P/E multiple of 24x is at the higher end of the average trailing three-year
historical trading range, which we believe is appropriate given Colgate's strong
brand equity, which will likely help it maintain a premium rating despite
increasing competition. Over the last five years, the stock has traded in a P/E
range of 14x-28x (average 21x). Colgate's relative PE to the broad market is
currently at ~1.7x, i.e., at the higher end of the last five-year range of 0.8x-1.9x,
thus the risk reward at current levels appears unfavorable. At 26x one-year
forward P/E, we believe that the stock fully captures the growth expectations
(we forecast ~8% EPS CAGR over FY10-FY13E).
Risks
We rate the stock as Low Risk based on our quantitative risk-rating system,
which tracks 260-day historical share price volatility. Key upside risks include:
1) Benign input cost environment onwards may provide further buffer to the
margin expansion in FY11; 2) Brand building spends remains key towards
profitability - Any major cutback in ad spends, due to easing competitive
pressures or lack of new product launches, may provide upside risk to our
estimates; and 3) higher than forecast margin expansion, driven by
amalgamation of the various contract manufacturers.
India Equity Research Reports, IPO and Stock News Visit http://indiaer.blogspot.com/ for complete details �� ��
Colgate Palmolive (India) (COLG.BO)
Sell: 3QFY11 Profits Decline as Ad Spends Soar
Steady volumes… — Revenue growth of ~13% Y/Y to Rs5.8bn was a tad lower
than our expectations, driven by underlying volume growth of ~12% Y/Y.
Toothpaste & toothbrushes volume growth of 13% & 24% Y/Y respectively
remained steady. Market share trends were encouraging, especially in toothpaste
(+90bps Y/Y to ~53.4% YTD CY10). Volume shares in toothbrushes and
mouthwash increased YoY to 40.9% and 17.3% respectively, while toothpowder
was slightly lower at ~47.3%.
... but at a cost to margins — 23% Y/Y EBITDA decline to Rs931m disappointed
as margins contracted 760bps Y/Y & 660bps QoQ to ~16.1%, meaningfully below
forecasts. The main reason for the earnings miss was the substantially higher ad
spends in 3Q (+60% Y/Y). While we did expect 3Q ad spends to rise (heightened
competitive intensity and timing of the Oral Health Month / festive season), the
magnitude was a negative surprise. We note that the reported gross margins
(62.5%, +~360bps Y/Y) & SGA (+48% Y/Y) aren’t comparable with the previous
year, given distortions arising from the amalgamation of the contract
manufacturers. PAT declined 43% Y/Y to Rs662m.
Paring estimates & target price — Our TP is revised to Rs800 from Rs870
(based on 24x FY12E) as we cut our FY11-13E EPS est. by 3-15%, tweaking our
cost assumptions (GMs, advertising and SG&A) – in line with recent trends.
Maintain Sell — Going forward, profit growth is likely to be impacted by a slight
moderation in revenue growth and increasing competition from Hindustan
Unilever, Dabur & possibly P&G. We don’t expect ad to sales ratio to come off as
mgmt attempts to maintain share of voice with customers. Colgate's relative PE to
the market is currently at ~1.7x, is at the higher end of the last five-year range
(0.8x-1.9x). Risk reward appears unfavorable at this juncture, in our view.
Upside risks — a) Ad expenses lower than forecast going forward, and b) further
margin expansion, driven by amalgamation of contract manufacturers.
Cutting Earnings Estimates
Post the disappointing results, we cut our FY11-13E EPS estimates by 3-15%,
tweaking our cost assumptions (GMs, advertising and SG&A).
There are marginal changes (-1%) to our revenue (realization) growth
estimates going forward – we expect growth rates to slightly moderate going
forward – estimate 13% net revenue CAGR over FY10-13E (v/s 15% over
FY07-10).
Our EBITDA margins have been pared by 340bps to 20.1% for FY11E,
driven by higher brand building spends and other expenses. Our assumption
for advertising to revenues in FY11E and FY12E is ~16.3%, up from ~15.3%
in FY10. We also expect some gross margin contraction going forward.
We have marginally tweaked our tax rates in line with management
guidance. Post expiry of the tax shield at the Baddi facility (down to 30%
from 100%), the effective tax rates have gone up ~24-25% from FY11E
onwards.
We reduce EPS estimates by 15% for FY11E, and also by 3-8% for FY12-
13E. Our DPS forecasts have been cut, as we maintain the dividend payout
ratio at ~65%, in-line with FY10.
Reiterate Sell; Target Price of Rs800
Given the cut in earnings, our target price is revised to Rs800 (Rs870 earlier),
based on 24x March-2012E earnings. We forecast ~8% EPS CAGR over
FY10-13E. The stock trades at ~26x one yr forward P/E, higher than its trailing
5 yr average of 21x. From a relative perspective too, Colgate’s PE to the broad
market is currently at 1.7x, i.e. at the higher end of the five-year range of 0.8x-
1.9x. We think that risk reward at current levels is unfavorable.
Colgate Palmolive (India)
Valuation
We use a P/E based methodology to value Colgate India because of its steady
growth profile. Our target price of Rs800 is based on 24x Mar12E earnings. Our
target P/E multiple of 24x is at the higher end of the average trailing three-year
historical trading range, which we believe is appropriate given Colgate's strong
brand equity, which will likely help it maintain a premium rating despite
increasing competition. Over the last five years, the stock has traded in a P/E
range of 14x-28x (average 21x). Colgate's relative PE to the broad market is
currently at ~1.7x, i.e., at the higher end of the last five-year range of 0.8x-1.9x,
thus the risk reward at current levels appears unfavorable. At 26x one-year
forward P/E, we believe that the stock fully captures the growth expectations
(we forecast ~8% EPS CAGR over FY10-FY13E).
Risks
We rate the stock as Low Risk based on our quantitative risk-rating system,
which tracks 260-day historical share price volatility. Key upside risks include:
1) Benign input cost environment onwards may provide further buffer to the
margin expansion in FY11; 2) Brand building spends remains key towards
profitability - Any major cutback in ad spends, due to easing competitive
pressures or lack of new product launches, may provide upside risk to our
estimates; and 3) higher than forecast margin expansion, driven by
amalgamation of the various contract manufacturers.
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