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Colgate-Palmolive (India)
Limited Underweight
COLG.BO, CLGT IN
Healthy volume growth trends overshadowed by sharp
margin compression
Colgate-Palmolive (India) reported weak earnings for Q1FY12. While
sales growth of 15.6% y/y was healthy and inline with our expectations,
earnings declined 18% y/y impacted by weak gross margins, high brand
spends and increased tax rates.
Healthy volume growth trends maintained… Colgate registered 12%
overall volume growth led by strong 14% volume growth for toothpaste.
These growth rates are encouraging, supported by faster growth for
premium products like Total, MaxFresh and Sensitive Pro-Relief
toothpaste. Management noted that rural growth rates have been 150-
200bps ahead of urban growth. Pricing growth during the qtr was 3.5%
on account of price hikes undertaken during May-June’11.
…but EBITDA suffers from weak gross margins and higher ad
spends. High input costs (crude, essential oils, menthol and sorbitol in
particular) led to 320bp y/y compression in gross margins. Further A&P
spends rose 42% y/y led by investments behind new product launches.
Other expenses also witnessed higher than expected increase (+24% y/y)
on account of increased freight costs.
Management discussion takeaways. 1) RM inflation is likely to abate
on a sequential basis on account of moderation in key RM prices, though
on y/y basis gross margin decline will continue over next 1-2 qtrs, 2)
A&P spends (though volatile on quarterly basis) likely to remain at
higher levels (~16-17% of sales) during FY12 as Colgate continues to
aggressively promote premium brands like Sensitive toothpastes, 3)
Market share trends for Colgate were stable for both toothpaste and
toothbrush segments, 4) Tax rate for FY12 to be ~24-25% with increase
of 200-300bp in FY13 as tax benefits for Baddi plant subside and
incremental production comes from non-tax benefit zones.
Maintain UW. Current valuations at 29x FY12E and 25x FY13E are
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
COLG.BO, CLGT IN
Healthy volume growth trends overshadowed by sharp
margin compression
Colgate-Palmolive (India) reported weak earnings for Q1FY12. While
sales growth of 15.6% y/y was healthy and inline with our expectations,
earnings declined 18% y/y impacted by weak gross margins, high brand
spends and increased tax rates.
Healthy volume growth trends maintained… Colgate registered 12%
overall volume growth led by strong 14% volume growth for toothpaste.
These growth rates are encouraging, supported by faster growth for
premium products like Total, MaxFresh and Sensitive Pro-Relief
toothpaste. Management noted that rural growth rates have been 150-
200bps ahead of urban growth. Pricing growth during the qtr was 3.5%
on account of price hikes undertaken during May-June’11.
…but EBITDA suffers from weak gross margins and higher ad
spends. High input costs (crude, essential oils, menthol and sorbitol in
particular) led to 320bp y/y compression in gross margins. Further A&P
spends rose 42% y/y led by investments behind new product launches.
Other expenses also witnessed higher than expected increase (+24% y/y)
on account of increased freight costs.
Management discussion takeaways. 1) RM inflation is likely to abate
on a sequential basis on account of moderation in key RM prices, though
on y/y basis gross margin decline will continue over next 1-2 qtrs, 2)
A&P spends (though volatile on quarterly basis) likely to remain at
higher levels (~16-17% of sales) during FY12 as Colgate continues to
aggressively promote premium brands like Sensitive toothpastes, 3)
Market share trends for Colgate were stable for both toothpaste and
toothbrush segments, 4) Tax rate for FY12 to be ~24-25% with increase
of 200-300bp in FY13 as tax benefits for Baddi plant subside and
incremental production comes from non-tax benefit zones.
Maintain UW. Current valuations at 29x FY12E and 25x FY13E are
expensive in our view.
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