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Colgate India -Dec Q weaker than expected on A&P spend surge
„Expect profits to pick up going forward; Maintain Buy
Net profit of Rs663bn was down 43% yoy. While we had estimated earnings to
fall, this decline was much higher than our expectations. The key reason was a
60% yoy jump in A&P spend, which shot up to an all-time-high level of 21% of
sales. We cut our estimates by 2-6% over FY11-13E to factor in the Dec Q miss
and lower margins on account of the higher A&P spend, staff costs and overhead
going forward. We cut our PO to Rs915, in line with the earnings cut. We maintain
our Buy rating on steady fundamentals, an expected healthy 17% EPS CAGR
over FY10-13E and reasonable valuation.
Sales growth remains healthy, with steady volume growth
Colgate sustained reasonable 13% sales growth in Dec Q, with strong volume
growth of 12% in Toothpaste and 24% in Toothbrush, combined with a 120bp
market share gain in both these categories. We estimate sales growth of ~14-15%
for FY11-12E. A renewed focus on categories like Mouthwash is encouraging, as
Colgate has gained 11% market share in the category post the increased efforts.
Margin hit temporary, as A&P spend should normalize
Colgate lost a massive 760bp in margin during the Dec Q. This was largely driven
by a 620bp hit from higher A&P spend. Overhead and Staff costs remained high
post the merger of acquired suppliers. We expect A&P spend to normalize over
the next few quarters, as this is just a temporary spurt. However, we have cut our
margin estimates by ~140bp to factor in the overall rise in cost of doing business.
Strong business fundamentals to sustain valuations
Business fundamentals remain strong, as 1) sales growth and market share gains
should sustain, and 2) margins should revive on better scale efficiencies. With low
visibility on P&G’s foray, competition looks manageable. We, therefore, expect
current valuations to sustain. We reiterate Buy with PO of Rs915 at 22xFY12 P/E.
Earnings hit in Dec Q is one-off
Net profit of Rs663bn was down 43% yoy. While we had estimated earnings to
fall, this decline was much higher than our expectations. The key reason was a
60% yoy jump in A&P spend, which shot up to an all-time-high level of 21% of
sales.
„ Colgate sustained reasonable 13% sales growth in the Dec Q, with strong
volume growth of 12% in Toothpaste and 24% in Toothbrush, combined with
a 120bp market share gain in both these categories.
„ Colgate lost a massive 760bp in margin during the Dec Q. This was largely
driven by a 620bp hit from higher A&P spend. Overhead and Staff costs
remained high post the merger of acquired suppliers.
„ The tax rate came in at 27%, as the Baddi facility (50% of Colgate)
production is now out of the 100% tax exemption period. Currently, the tax
break is only 30% for this plant.
Maintain Buy but PO cut to Rs915
We maintain our Buy rating on Colgate, despite the slowdown in EPS growth in
FY11E. Our rating is based on strong business fundamentals that are supported
by strong consumer demand in both urban and rural India, rising margins driven
by integrations of suppliers and scale efficiencies. At the PBT level, we expect
Colgate to achieve a 22% earnings CAGR over FY10-13E and, hence, we believe
a tax rate hit in FY11E is not a good enough reason to de-rate the stock.
Entry by P&G into India is an event to watch out for. However, given there is no
visibility yet on P&G’s timing, product positioning, pricing and roll-out strategy, we
believe it is not yet a de-rating factor.
We have cut our estimates for Colgate by 2-6% over FY11-13E to factor in lower
margins. We have also cut our PO to Rs915 (Rs930), in line with the earnings
cut. Our PO is based on a target P/E multiple of 22x on our FY12E EPS estimate
of Rs41. This multiple is at a 10pct premium to the last 5-year trading average for
Colgate. We believe this premium is justified, given acceleration in operating
earnings for Colgate, led by strong top-line growth, driven by healthy volume
growth, market share gains and margin expansion.
Price objective basis & risk
Colgate India (CPIYF)
Our preferred valuation methodology is a target P/E multiple on one-year forward
EPS. Our target multiple for Colgate is 22x, which, on FY12E EPS of Rs41, gives
us our price objective of Rs915. This multiple is at a 10pct premium to the last 5-
year trading average for Colgate. We believe this premium is justified, given
acceleration in operating earnings for Colgate led by strong top-line growth driven
by healthy volume growth, market share gains and margin expansion. We believe
using a target PE of 22x is justified given Colgate's business fundamentals are
still strong, with its leadership position, strong brands, quality management and,
most importantly, one of the highest ROEs in the FMCG sector, at 130pct. Upside
risks: Stronger-than-expected improvement in rural demand and higher-thanexpected margin gains. Downside risks: Stiffer competition and increase in input
costs.
India Equity Research Reports, IPO and Stock News Visit http://indiaer.blogspot.com/ for complete details �� ��
Colgate India -Dec Q weaker than expected on A&P spend surge
„Expect profits to pick up going forward; Maintain Buy
Net profit of Rs663bn was down 43% yoy. While we had estimated earnings to
fall, this decline was much higher than our expectations. The key reason was a
60% yoy jump in A&P spend, which shot up to an all-time-high level of 21% of
sales. We cut our estimates by 2-6% over FY11-13E to factor in the Dec Q miss
and lower margins on account of the higher A&P spend, staff costs and overhead
going forward. We cut our PO to Rs915, in line with the earnings cut. We maintain
our Buy rating on steady fundamentals, an expected healthy 17% EPS CAGR
over FY10-13E and reasonable valuation.
Sales growth remains healthy, with steady volume growth
Colgate sustained reasonable 13% sales growth in Dec Q, with strong volume
growth of 12% in Toothpaste and 24% in Toothbrush, combined with a 120bp
market share gain in both these categories. We estimate sales growth of ~14-15%
for FY11-12E. A renewed focus on categories like Mouthwash is encouraging, as
Colgate has gained 11% market share in the category post the increased efforts.
Margin hit temporary, as A&P spend should normalize
Colgate lost a massive 760bp in margin during the Dec Q. This was largely driven
by a 620bp hit from higher A&P spend. Overhead and Staff costs remained high
post the merger of acquired suppliers. We expect A&P spend to normalize over
the next few quarters, as this is just a temporary spurt. However, we have cut our
margin estimates by ~140bp to factor in the overall rise in cost of doing business.
Strong business fundamentals to sustain valuations
Business fundamentals remain strong, as 1) sales growth and market share gains
should sustain, and 2) margins should revive on better scale efficiencies. With low
visibility on P&G’s foray, competition looks manageable. We, therefore, expect
current valuations to sustain. We reiterate Buy with PO of Rs915 at 22xFY12 P/E.
Earnings hit in Dec Q is one-off
Net profit of Rs663bn was down 43% yoy. While we had estimated earnings to
fall, this decline was much higher than our expectations. The key reason was a
60% yoy jump in A&P spend, which shot up to an all-time-high level of 21% of
sales.
„ Colgate sustained reasonable 13% sales growth in the Dec Q, with strong
volume growth of 12% in Toothpaste and 24% in Toothbrush, combined with
a 120bp market share gain in both these categories.
„ Colgate lost a massive 760bp in margin during the Dec Q. This was largely
driven by a 620bp hit from higher A&P spend. Overhead and Staff costs
remained high post the merger of acquired suppliers.
„ The tax rate came in at 27%, as the Baddi facility (50% of Colgate)
production is now out of the 100% tax exemption period. Currently, the tax
break is only 30% for this plant.
Maintain Buy but PO cut to Rs915
We maintain our Buy rating on Colgate, despite the slowdown in EPS growth in
FY11E. Our rating is based on strong business fundamentals that are supported
by strong consumer demand in both urban and rural India, rising margins driven
by integrations of suppliers and scale efficiencies. At the PBT level, we expect
Colgate to achieve a 22% earnings CAGR over FY10-13E and, hence, we believe
a tax rate hit in FY11E is not a good enough reason to de-rate the stock.
Entry by P&G into India is an event to watch out for. However, given there is no
visibility yet on P&G’s timing, product positioning, pricing and roll-out strategy, we
believe it is not yet a de-rating factor.
We have cut our estimates for Colgate by 2-6% over FY11-13E to factor in lower
margins. We have also cut our PO to Rs915 (Rs930), in line with the earnings
cut. Our PO is based on a target P/E multiple of 22x on our FY12E EPS estimate
of Rs41. This multiple is at a 10pct premium to the last 5-year trading average for
Colgate. We believe this premium is justified, given acceleration in operating
earnings for Colgate, led by strong top-line growth, driven by healthy volume
growth, market share gains and margin expansion.
Price objective basis & risk
Colgate India (CPIYF)
Our preferred valuation methodology is a target P/E multiple on one-year forward
EPS. Our target multiple for Colgate is 22x, which, on FY12E EPS of Rs41, gives
us our price objective of Rs915. This multiple is at a 10pct premium to the last 5-
year trading average for Colgate. We believe this premium is justified, given
acceleration in operating earnings for Colgate led by strong top-line growth driven
by healthy volume growth, market share gains and margin expansion. We believe
using a target PE of 22x is justified given Colgate's business fundamentals are
still strong, with its leadership position, strong brands, quality management and,
most importantly, one of the highest ROEs in the FMCG sector, at 130pct. Upside
risks: Stronger-than-expected improvement in rural demand and higher-thanexpected margin gains. Downside risks: Stiffer competition and increase in input
costs.
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