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For 3QFY2011, Colgate reported a weak performance, below our estimates.
Top-line growth stood at 13.8% yoy, 1.2% below our estimates, driven completely
by volumes. Earnings declined by 43% yoy due to a sharp contraction in OPM
and higher tax from the manufacturing plant in Baddi. Operating margins
contracted by 719bp yoy due to higher ad spends, other expenses and staff cost.
We maintain our Reduce recommendation on the stock.
Steady growth in oral care: Colgate registered top-line growth of 13.8% yoy,
completely driven by volume growth (registered 12% growth in overall volumes).
The toothpaste category witnessed strong volume growth of 13% yoy, resulting in
higher volume market share to 53.4% (52.3%). All core brands, Colgate dental
cream, Active Salt, Max Fresh and Cibaca contributed to top-line growth. In the
toothbrush category, Colgate gained a market share to 40.9% (39.7%) and
registered volume growth of 24% yoy. The toothpowder category grew at a slower
pace than last year and lost its market share, which currently stands at 47.3%.
Colgate Plax registered strong volume market share growth of 17.3% (6.6%).
Outlook and valuation: Post 3QFY2011 results, we have revised our earnings
estimates downward by 6–7% to factor in higher advertisement expense (modeled
an increase of 75bp yoy for FY2011E) and other expenses (modeled an increase
of 63bp yoy for FY2011E) resulting in a 40bp yoy margin contraction. During
FY2010–12E, we expect Colgate’s top line to report a 14.6% CAGR (largely
driven by volume growth). However, in terms of earnings, we expect Colgate to
register muted ~5.4% CAGR impacted by (1.1%) decline in FY2011E, as we
model in higher tax rate (~24% in FY2011). Hence, we retain our Reduce rating
on the stock with a revised Target Price of `761 (`821), based on 22x FY2012E
EPS, in line with its historical valuation.
Earnings growth misses estimates by 38%
In terms of earnings, Colgate reported a decline of 43.1% yoy, below our
estimates, to `66.2cr (`116.4cr). Earnings during the quarter were affected by a
margin contraction, 63.3% yoy jump in depreciation charges and 309% yoy rise in
tax rate (owing to expiry of benefits from the Baddi plant).
Higher gross margins, OPM dips due to low operating leverage
On the operating front, Colgate delivered a margin contraction of 719bp yoy to
13.4% (20.6%), resulting in a decline of 26% yoy in EBITDA to `74.6cr
(`100.8cr). Colgate exhibited gross margins expansion largely owing to benefits
from amalgamation of subsidiaries to the tune of 411bp yoy (121bp qoq), which is
positive, considering the current existing raw material inflationary scenario.
Colgate increased its ad spends by 626bp yoy (60.2% yoy absolute increase),
impacting margin contraction. Moreover, a significant spike in staff costs (up
110bp yoy, 28.9% absolute rise) and other expenses (up 393bp yoy, 48.1%
absolute rise) further impacted margin contraction.
Investment concerns
Competitive intensity to get heated: We believe competition in the oral care
category is set to intensify among all players post Glaxo’s launch of Sensodyne
and HUL showing aggression through product launches and higher ad
spends. We also expect P&G to intensify competition in India, as it is doing
globally. This could lead to higher ad spends and affect Colgate’s profitability.
Peak margins at risk, higher tax rate to limit earnings growth: We highlight
that operating margin of 21.7% in FY2010 was at an all-time high. While we
have modeled in a margin contraction of 40bp over FY2010–12E, we
highlight the same is at risk to – 1) higher excise duty due to further roll-back,
2) rise in competitive intensity and 3) deterioration in product mix. Moreover,
we have modeled in higher tax rate in FY2011–12E at 24–25%, as income tax
benefits at the Baddi facility reduce from 100% to 30% and as production
increases at the Goa plant; these factors will likely limit the company’s
earnings growth at a ~5.4% CAGR over FY2010–12E.
Expensive valuations for muted earnings CAGR: At the CMP of `824, the stock
is trading at P/E of 23.8x FY2012E EPS, a ~9% premium to its 5yr average P/E
of 21.8, which we believe is highly expensive given a muted ~5.4% CAGR.
Outlook and valuation
Post 3QFY2011 results, we have revised our earnings estimates downward by 6–7%
to factor in higher advertisement expense (modeled an increase of 75bp yoy for
FY2011E) and other expenses (modeled an increase of 63bp yoy for FY2011E),
resulting in a 40bp yoy margin contraction.
During FY2010–12E, we expect Colgate’s top line to report a 14.6% CAGR (largely
driven by volume growth). However, in terms of earnings, we expect Colgate to
register muted ~5.4% CAGR as we model in higher tax rate. Hence, we retain our
Reduce rating on the stock with a revised Target Price of `761 (`821), based on 22x
FY2012E EPS, in line with its historical valuation.
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Colgate Palmolive – 3QFY2011 Result Update
Angel Broking maintains a Reduce on Colgate Palmolive with a Target Price of Rs. 761.
For 3QFY2011, Colgate reported a weak performance, below our estimates.
Top-line growth stood at 13.8% yoy, 1.2% below our estimates, driven completely
by volumes. Earnings declined by 43% yoy due to a sharp contraction in OPM
and higher tax from the manufacturing plant in Baddi. Operating margins
contracted by 719bp yoy due to higher ad spends, other expenses and staff cost.
We maintain our Reduce recommendation on the stock.
Steady growth in oral care: Colgate registered top-line growth of 13.8% yoy,
completely driven by volume growth (registered 12% growth in overall volumes).
The toothpaste category witnessed strong volume growth of 13% yoy, resulting in
higher volume market share to 53.4% (52.3%). All core brands, Colgate dental
cream, Active Salt, Max Fresh and Cibaca contributed to top-line growth. In the
toothbrush category, Colgate gained a market share to 40.9% (39.7%) and
registered volume growth of 24% yoy. The toothpowder category grew at a slower
pace than last year and lost its market share, which currently stands at 47.3%.
Colgate Plax registered strong volume market share growth of 17.3% (6.6%).
Outlook and valuation: Post 3QFY2011 results, we have revised our earnings
estimates downward by 6–7% to factor in higher advertisement expense (modeled
an increase of 75bp yoy for FY2011E) and other expenses (modeled an increase
of 63bp yoy for FY2011E) resulting in a 40bp yoy margin contraction. During
FY2010–12E, we expect Colgate’s top line to report a 14.6% CAGR (largely
driven by volume growth). However, in terms of earnings, we expect Colgate to
register muted ~5.4% CAGR impacted by (1.1%) decline in FY2011E, as we
model in higher tax rate (~24% in FY2011). Hence, we retain our Reduce rating
on the stock with a revised Target Price of `761 (`821), based on 22x FY2012E
EPS, in line with its historical valuation.
Top-line growth below estimates, volume growth at 12%
Colgate posted modest top-line growth of 13.8% yoy to `558cr (`491cr), below
our estimates, largely led by steady volume growth of 13% in its core toothpaste
category. The toothbrush category recorded healthy 24% volume growth, while the
toothpowder category registered a marginal decline in volume. Overall volume
growth for the quarter stood at 12%. All core brands, Colgate Dental Cream, Active
Salt, Max Fresh and Cibaca performed well and contributed to the modest top-line
growth.
In terms of volume market share, Colgate strengthened its position in the
toothpaste category by 110bp yoy to 53.4% and by 120bp yoy in the toothbrush
category to 40.9%. However, the toothpowder category recorded a decline in
market share and stood at 47.3% for the period mentioned above. The market
shares indicated are from January–November 2010.
Earnings growth misses estimates by 38%
In terms of earnings, Colgate reported a decline of 43.1% yoy, below our
estimates, to `66.2cr (`116.4cr). Earnings during the quarter were affected by a
margin contraction, 63.3% yoy jump in depreciation charges and 309% yoy rise in
tax rate (owing to expiry of benefits from the Baddi plant).
Higher gross margins, OPM dips due to low operating leverage
On the operating front, Colgate delivered a margin contraction of 719bp yoy to
13.4% (20.6%), resulting in a decline of 26% yoy in EBITDA to `74.6cr
(`100.8cr). Colgate exhibited gross margins expansion largely owing to benefits
from amalgamation of subsidiaries to the tune of 411bp yoy (121bp qoq), which is
positive, considering the current existing raw material inflationary scenario.
Colgate increased its ad spends by 626bp yoy (60.2% yoy absolute increase),
impacting margin contraction. Moreover, a significant spike in staff costs (up
110bp yoy, 28.9% absolute rise) and other expenses (up 393bp yoy, 48.1%
absolute rise) further impacted margin contraction.
Investment concerns
Competitive intensity to get heated: We believe competition in the oral care
category is set to intensify among all players post Glaxo’s launch of Sensodyne
and HUL showing aggression through product launches and higher ad
spends. We also expect P&G to intensify competition in India, as it is doing
globally. This could lead to higher ad spends and affect Colgate’s profitability.
Peak margins at risk, higher tax rate to limit earnings growth: We highlight
that operating margin of 21.7% in FY2010 was at an all-time high. While we
have modeled in a margin contraction of 40bp over FY2010–12E, we
highlight the same is at risk to – 1) higher excise duty due to further roll-back,
2) rise in competitive intensity and 3) deterioration in product mix. Moreover,
we have modeled in higher tax rate in FY2011–12E at 24–25%, as income tax
benefits at the Baddi facility reduce from 100% to 30% and as production
increases at the Goa plant; these factors will likely limit the company’s
earnings growth at a ~5.4% CAGR over FY2010–12E.
Expensive valuations for muted earnings CAGR: At the CMP of `824, the stock
is trading at P/E of 23.8x FY2012E EPS, a ~9% premium to its 5yr average P/E
of 21.8, which we believe is highly expensive given a muted ~5.4% CAGR.
Outlook and valuation
Post 3QFY2011 results, we have revised our earnings estimates downward by 6–7%
to factor in higher advertisement expense (modeled an increase of 75bp yoy for
FY2011E) and other expenses (modeled an increase of 63bp yoy for FY2011E),
resulting in a 40bp yoy margin contraction.
During FY2010–12E, we expect Colgate’s top line to report a 14.6% CAGR (largely
driven by volume growth). However, in terms of earnings, we expect Colgate to
register muted ~5.4% CAGR as we model in higher tax rate. Hence, we retain our
Reduce rating on the stock with a revised Target Price of `761 (`821), based on 22x
FY2012E EPS, in line with its historical valuation.
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