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Colgate-Palmolive India Ltd ----------------------------------------------------- Maintain NEUTRAL
High ad spends impact 3Q11 results; limited upside to valuations
Colgate reported 3Q11 numbers below our estimates mainly on
account of higher ad spends and tax rates. Revenue growth at
13% YoY was in-line with our expectations.
● Ad spends increased sharply to 21% (+620 bp YoY), mainly due
to a delayed marketing campaign (conducted in Oct) and a catch
up in expenditure from the low levels in 1HFY11 (~13% of sales).
● We are encouraged by the sustained double-digit volume growth
(12% in 3Q11) and improvement in market share (110 bp YoY in
Jan-Nov 2010). Helped by benign input costs, Colgate has taken
minimal price increases in its portfolio – <2% YTD on average.
However, in the event of high cost inflation, the current pricing
environment may not allow a complete pass-through, posing a risk
to margins in our view.
● We update our estimates for FY11-13E revenues (down 2-3%)
and margins (down 20-80 bp) post 3Q11. We raise our tax rate
assumptions (from 23% to 28%) for FY12/13E, resulting in a 11-
12% drop in EPS. Our TP declines to Rs826. Maintain NEUTRAL
Colgate 3Q11 results below estimates
Colgate reported 3Q11 revenue growth at 13%, in-line with our
estimates. However, margins disappointed mainly due to high ad
spends – at 21% of sales, up 620 bp YoY.
High ad spends to normalise
This year, the company conducted its annual OHM (oral health month)
activity a month later in October – with the resultant impact in 3Q11. In
addition, there was a general catch up in expenditure given the low
levels of brand investment over the last two quarters (~13% of sales).
Going forward, we expect ad spend levels to normalise to 16% of
sales on an annual basis (in-line with management guidance).
Underlying operations remain stable
With sustained double-digit volume growth (12% in 3Q11), Colgate
has improved its market share during the last year – up 110 bp YoY to
53.4% (Jan-Nov 2010). Revenue growth continues to be driven by
volumes, with minimal pricing / mix improvement.
Input cost inflation has not been a major cause for concern for Colgate.
While raw material costs jumped last quarter, they have remained
fairly benign since. As a result, price increase in toothpastes, unlike
many other consumer categories, have been limited to less than 2%
YTD – and mostly restricted to the higher end of the segment.
Industry dynamics (growth and competitive landscape) remain stable
with no signs of downtrading. However, in the event of high cost
inflation, we do not think the current pricing environment is conducive
enough for a complete pass-through – posing a risk to margins.
Changes to estimates
We slightly reduce our revenue estimates (2-3%) and margin forecast
(20-80 bp) for FY11-13E. We also increase our tax rates significantly
for FY12/13E from 23% to 28% (as per management guidance) due to
reduction in tax benefits at its Baddi plant. Our FY11E EPS declines
6.5%, while FY12/13E EPS drop 11-12%. We cut our DCF-based
target price by 6% to Rs826 (from Rs884).
While there are impending risks to margins and competitive intensity,
we like Colgate for its defensive nature – high ROCEs, strong cash
flows and balance sheet. The company has displayed its ability to
maintain its market share and volume growth in the midst of stiff
competition. At current valuations (26x FY12E EPS), however, the
stock is fairly valued in our view. We maintain our NEUTRAL rating.
India Equity Research Reports, IPO and Stock News Visit http://indiaer.blogspot.com/ for complete details �� ��
Colgate-Palmolive India Ltd ----------------------------------------------------- Maintain NEUTRAL
High ad spends impact 3Q11 results; limited upside to valuations
Colgate reported 3Q11 numbers below our estimates mainly on
account of higher ad spends and tax rates. Revenue growth at
13% YoY was in-line with our expectations.
● Ad spends increased sharply to 21% (+620 bp YoY), mainly due
to a delayed marketing campaign (conducted in Oct) and a catch
up in expenditure from the low levels in 1HFY11 (~13% of sales).
● We are encouraged by the sustained double-digit volume growth
(12% in 3Q11) and improvement in market share (110 bp YoY in
Jan-Nov 2010). Helped by benign input costs, Colgate has taken
minimal price increases in its portfolio – <2% YTD on average.
However, in the event of high cost inflation, the current pricing
environment may not allow a complete pass-through, posing a risk
to margins in our view.
● We update our estimates for FY11-13E revenues (down 2-3%)
and margins (down 20-80 bp) post 3Q11. We raise our tax rate
assumptions (from 23% to 28%) for FY12/13E, resulting in a 11-
12% drop in EPS. Our TP declines to Rs826. Maintain NEUTRAL
Colgate 3Q11 results below estimates
Colgate reported 3Q11 revenue growth at 13%, in-line with our
estimates. However, margins disappointed mainly due to high ad
spends – at 21% of sales, up 620 bp YoY.
High ad spends to normalise
This year, the company conducted its annual OHM (oral health month)
activity a month later in October – with the resultant impact in 3Q11. In
addition, there was a general catch up in expenditure given the low
levels of brand investment over the last two quarters (~13% of sales).
Going forward, we expect ad spend levels to normalise to 16% of
sales on an annual basis (in-line with management guidance).
Underlying operations remain stable
With sustained double-digit volume growth (12% in 3Q11), Colgate
has improved its market share during the last year – up 110 bp YoY to
53.4% (Jan-Nov 2010). Revenue growth continues to be driven by
volumes, with minimal pricing / mix improvement.
Input cost inflation has not been a major cause for concern for Colgate.
While raw material costs jumped last quarter, they have remained
fairly benign since. As a result, price increase in toothpastes, unlike
many other consumer categories, have been limited to less than 2%
YTD – and mostly restricted to the higher end of the segment.
Industry dynamics (growth and competitive landscape) remain stable
with no signs of downtrading. However, in the event of high cost
inflation, we do not think the current pricing environment is conducive
enough for a complete pass-through – posing a risk to margins.
Changes to estimates
We slightly reduce our revenue estimates (2-3%) and margin forecast
(20-80 bp) for FY11-13E. We also increase our tax rates significantly
for FY12/13E from 23% to 28% (as per management guidance) due to
reduction in tax benefits at its Baddi plant. Our FY11E EPS declines
6.5%, while FY12/13E EPS drop 11-12%. We cut our DCF-based
target price by 6% to Rs826 (from Rs884).
While there are impending risks to margins and competitive intensity,
we like Colgate for its defensive nature – high ROCEs, strong cash
flows and balance sheet. The company has displayed its ability to
maintain its market share and volume growth in the midst of stiff
competition. At current valuations (26x FY12E EPS), however, the
stock is fairly valued in our view. We maintain our NEUTRAL rating.
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