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Colgate-Palmolive (India) Limited
▼ Underweight Previous: Neutral; COLG.BO, CLGT IN
Muted earnings performance; Downgrade to UW
• Earnings disappoint: The company reported Net sales, EBITDA and PAT
growth of 14%, -20% and -37% y/y respectively for Q3FY11. Although
revenues came in line with our expectations, EBITDA and net profit were
significantly below our estimates on the back of considerably higher brand
building expenses and higher tax rates.
• Volume growth holds up: Toothpaste vol growth was healthy at 13%. Clearly
Colgate’s efforts involving a combination of step-up in differentiated
consumption-building programs and rural distribution reach are leading to
steady vol growth trends. Overall volume growth during the quarter was 12%
with toothbrushes registering 24% vol growth. Net sales value growth was
13.8% implying that price/mix growth was 1.8% aided by some price hikes
undertaken in Cibaca portfolio during the qtr. Market share trends in toothpaste
category remained healthy with the company registering 53.4% vol share during
Jan-Nov’10 (+110bp y/y).
• However growth is coming at a price; advertising spends play the
spoilsport: Although gross margins were stable at 61.3% (+120bp q/q), higher
A&P expenses led to 20% y/y decline in operating profits. Ad spends rose 60%
y/y, much higher than our expectations. Over 9MFY11 A&P/Sales for the
company rose 150bp y/y to 16.4%. We expect competitive spends to remain
firm and have raised our estimates for A&P/Sales from 15.3% earlier to 16.1%
for FY11/12E. Potential entry of P&G in toothpastes and HUL getting
aggressive remains a key risk to the company's margins.
• RM inflation a likely risk. In our discussions management noted that raw
material cost pressures (particularly crude related/packaging costs and flavors)
have started to inch up sequentially which could weigh on GM going forward.
• Downgrade to UW: We have revised down our earnings estimates for FY11
and FY12 by 10% and 9% respectively as we now build in higher ad spends, and
lower gross margins (for FY12). As a result our Sep'11 target price is revised
down to Rs795 and we downgrade our rating on the stock from Neutral to
Underweight. At revised earnings the stock is trading at 28x FY11E and 25x
FY12E which is expensive in our view.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Colgate-Palmolive (India) Limited
▼ Underweight Previous: Neutral; COLG.BO, CLGT IN
Muted earnings performance; Downgrade to UW
• Earnings disappoint: The company reported Net sales, EBITDA and PAT
growth of 14%, -20% and -37% y/y respectively for Q3FY11. Although
revenues came in line with our expectations, EBITDA and net profit were
significantly below our estimates on the back of considerably higher brand
building expenses and higher tax rates.
• Volume growth holds up: Toothpaste vol growth was healthy at 13%. Clearly
Colgate’s efforts involving a combination of step-up in differentiated
consumption-building programs and rural distribution reach are leading to
steady vol growth trends. Overall volume growth during the quarter was 12%
with toothbrushes registering 24% vol growth. Net sales value growth was
13.8% implying that price/mix growth was 1.8% aided by some price hikes
undertaken in Cibaca portfolio during the qtr. Market share trends in toothpaste
category remained healthy with the company registering 53.4% vol share during
Jan-Nov’10 (+110bp y/y).
• However growth is coming at a price; advertising spends play the
spoilsport: Although gross margins were stable at 61.3% (+120bp q/q), higher
A&P expenses led to 20% y/y decline in operating profits. Ad spends rose 60%
y/y, much higher than our expectations. Over 9MFY11 A&P/Sales for the
company rose 150bp y/y to 16.4%. We expect competitive spends to remain
firm and have raised our estimates for A&P/Sales from 15.3% earlier to 16.1%
for FY11/12E. Potential entry of P&G in toothpastes and HUL getting
aggressive remains a key risk to the company's margins.
• RM inflation a likely risk. In our discussions management noted that raw
material cost pressures (particularly crude related/packaging costs and flavors)
have started to inch up sequentially which could weigh on GM going forward.
• Downgrade to UW: We have revised down our earnings estimates for FY11
and FY12 by 10% and 9% respectively as we now build in higher ad spends, and
lower gross margins (for FY12). As a result our Sep'11 target price is revised
down to Rs795 and we downgrade our rating on the stock from Neutral to
Underweight. At revised earnings the stock is trading at 28x FY11E and 25x
FY12E which is expensive in our view.
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