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Colgate-Palmolive (India) (CLGT)
Consumer products
Higher adspends indicate imminent launch of Oral-B. Colpal’s adspends were up
60% yoy in 3QFY11 impacting 3Q earnings (EBITDA down 23%) and likely leading to
an earnings decline in FY2011E. Consistent double-digit volume growth (12% in 3Q) is
commendable and is a testimony to Colgate’s market development activities and
consistency in approach (preference for volumes over short-term profits). Oral-B’s ‘Smile
India’ campaign is a precursor to toothpaste launch, in our view . Retain SELL
due to the event risk of disruptive competition (which may result in higher adspends).
Valuations of 23XFY2012E P/E doesn’t provide buffer either.
Lumpy adspends spoil the show
Colgate reported sales of Rs5.6 bn (+14%, KIE estimate Rs5.7 bn), EBITDA of Rs0.9 bn (-23%, KIE
estimate of Rs1.4 bn) and PAT of Rs0.66 bn (-37%, KIE estimate of Rs1.1 bn).
Volume growth was at 13% with toothpaste growing at 12%, toothbrush growing at 24%
and toothpowder likely flat
The cost line items are not comparable on yoy basis as the company has merged subsidiaries
engaged in contract manufacturing with itself
Colpal’s adspends has been very volatile historically. Please refer Exhibit 3 for its adspends trend
since 1992. We look at the period in three parts, (1) 1992-late 1990s with increasing spends due
to higher activity from HUL, (2) late 1990s-mid 2000s when adspends to sales went up from 12%
of sales to 21% of sales and retreated to 13% (HUL gaining shares initially as well as price-based
competition from Anchor, Ajanta etc. amidst consumer sector slowdown) and (3) ~15% of sales
since 2005 due to relatively benign competition.
P&G’s big bang entry with Oral B toothpaste likely
We continue to believe that the threat of P&G’s entry into toothpaste category in India, which can
likely result in disruptive competition for Colgate, is real. Oral care contributes ~6% (US$5 bn) of
P&G’s global sales with toothpaste contributing ~30% and toothbrushes ~45%. In the key market
of US, P&G has integrated ‘Crest’ and ‘Oral-B’ through the co-branding route. Industry sources
suggest that (1) P&G’s current focus (in its global oral care portfolio) is optimization of market
opportunity between its two leading brands—‘Oral-B’ and ‘Crest’ and (2) P&G will likely expand its
toothpaste offering into countries where Oral-B is strong.
In addition to impending competition from P&G, we remain cautious on Colgate on the
following counts: (1) Questionable amount of incremental penetration-led growth, (2)
deterioration in competitive position as effective excise rate increases, (3) limited pricing
power, (4) mix deterioration and (5) premium valuations for sub-par earnings growth.
Retain SELL, cut target price to Rs800
We reiterate SELL on the stock and have cut EPS estimates by ~4% to account for gross
margin pressure (higher packing material cost) and higher adspends. Our EPS estimates are
Rs31 and Rs36 for FY2011E and FY2012E, respectively. Key risks are (1) muted competitive
activity which would provide pricing power to Colgate, (2) any inorganic activity or
expansion of capacity in tax-exempt locations (particularly North-East), and (3) higher-thanexpected
volume growth.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Colgate-Palmolive (India) (CLGT)
Consumer products
Higher adspends indicate imminent launch of Oral-B. Colpal’s adspends were up
60% yoy in 3QFY11 impacting 3Q earnings (EBITDA down 23%) and likely leading to
an earnings decline in FY2011E. Consistent double-digit volume growth (12% in 3Q) is
commendable and is a testimony to Colgate’s market development activities and
consistency in approach (preference for volumes over short-term profits). Oral-B’s ‘Smile
India’ campaign is a precursor to toothpaste launch, in our view . Retain SELL
due to the event risk of disruptive competition (which may result in higher adspends).
Valuations of 23XFY2012E P/E doesn’t provide buffer either.
Lumpy adspends spoil the show
Colgate reported sales of Rs5.6 bn (+14%, KIE estimate Rs5.7 bn), EBITDA of Rs0.9 bn (-23%, KIE
estimate of Rs1.4 bn) and PAT of Rs0.66 bn (-37%, KIE estimate of Rs1.1 bn).
Volume growth was at 13% with toothpaste growing at 12%, toothbrush growing at 24%
and toothpowder likely flat
The cost line items are not comparable on yoy basis as the company has merged subsidiaries
engaged in contract manufacturing with itself
Colpal’s adspends has been very volatile historically. Please refer Exhibit 3 for its adspends trend
since 1992. We look at the period in three parts, (1) 1992-late 1990s with increasing spends due
to higher activity from HUL, (2) late 1990s-mid 2000s when adspends to sales went up from 12%
of sales to 21% of sales and retreated to 13% (HUL gaining shares initially as well as price-based
competition from Anchor, Ajanta etc. amidst consumer sector slowdown) and (3) ~15% of sales
since 2005 due to relatively benign competition.
P&G’s big bang entry with Oral B toothpaste likely
We continue to believe that the threat of P&G’s entry into toothpaste category in India, which can
likely result in disruptive competition for Colgate, is real. Oral care contributes ~6% (US$5 bn) of
P&G’s global sales with toothpaste contributing ~30% and toothbrushes ~45%. In the key market
of US, P&G has integrated ‘Crest’ and ‘Oral-B’ through the co-branding route. Industry sources
suggest that (1) P&G’s current focus (in its global oral care portfolio) is optimization of market
opportunity between its two leading brands—‘Oral-B’ and ‘Crest’ and (2) P&G will likely expand its
toothpaste offering into countries where Oral-B is strong.
In addition to impending competition from P&G, we remain cautious on Colgate on the
following counts: (1) Questionable amount of incremental penetration-led growth, (2)
deterioration in competitive position as effective excise rate increases, (3) limited pricing
power, (4) mix deterioration and (5) premium valuations for sub-par earnings growth.
Retain SELL, cut target price to Rs800
We reiterate SELL on the stock and have cut EPS estimates by ~4% to account for gross
margin pressure (higher packing material cost) and higher adspends. Our EPS estimates are
Rs31 and Rs36 for FY2011E and FY2012E, respectively. Key risks are (1) muted competitive
activity which would provide pricing power to Colgate, (2) any inorganic activity or
expansion of capacity in tax-exempt locations (particularly North-East), and (3) higher-thanexpected
volume growth.
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