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UBS Investment Research
Colgate-Palmolive India
T he power of the brand [EXTRACT]
We initiate coverage with an anti-consensus Buy rating
Colgate-Palmolive India (Colgate) is the leading oral care products company in
India with a 51% share of the toothpaste market in FY11. We initiate coverage
with an anti-consensus Buy rating, as we believe Colgate will benefit from: 1)
consumer upgrades; 2) a high market growth opportunity; 3) its strong distribution
network; and 4) powerful brand equity.
Product launches from parent portfolio a key trigger
The product pipeline in the next two to three years is a key reason for our positive
view on the company. We believe Colgate intends to diversify from the oral care
segment by launching products from the parent’s portfolio. Colgate currently
derives 95% of revenue from the oral care segment while the parent derives 43%;
we believe this needs to change and that it will be the key focus of management.
Competition to have a limited impact
Due to the ‘unorganised’ retail segment and well-entrenched brands, we believe a
new competitor will take share from the local brands rather than from the national
market leader. We forecast Colgate to grow volume 11-12% over FY12-15, despite
new competition, and that additional ad spend increases volumes in the segment
thereby benefiting Colgate, which has the widest distribution reach and the
strongest brand name.
Valuation: price target of Rs1,250.00
We derive our price target from a DCF-based methodology and explicitly forecast
long-term valuation drivers using UBS’s VCAM tool. We assume a WACC of
11% and a beta of 0.55.
Investment Thesis
We initiate coverage of Colgate-Palmolive India (Colgate) with an anticonsensus
Buy rating and a price target of Rs1,250.00. Colgate is the market
leader in the oral care segment with a 51% market share in FY11. We believe
Colgate is well-positioned to benefit from: 1) consumers up-trading from
toothpowder to toothpaste, especially in rural India; 2) a large market
opportunity in the form of a highly underpenetrated toothpaste market in India;
3) strong brand equity; and 4) Colgate’s distribution network that consists of
1,713 direct sales stores and about 4.5m indirect stores (third-party distribution).
Colgate’s parent derives just 43% of revenue from the oral care segment while the
Indian subsidiary derives 95% from the segment. We believe Colgate will
diversify from oral care by launching products from the parent’s portfolio.
Since 2004 we have noted aggressive competition between Hindustan Unilever
(HUL) and Proctor & Gamble (PG) in the detergents segment. While the market
leader (HUL) has not ceded market share, PG has gained share from the ‘tail’ of
the segment, ie, regional and local brands. We believe competition will have a
limited effect on Colgate’s business model. It should be able to maintain market
share despite new launches from competitors, as additional media coverage of a
new launch typically increases volume in the category which, in turn, benefits
the segment leader with the best distribution reach and the strongest brand. We
believe a new competitor will gain at the expense of the tail of the market, as
there is a move from local to national level brands.
We forecast Colgate will grow volume at 11-12% over FY12-15, and will be
able to pass on price increases on the strength of its brand. Colgate is currently
trading at 23.8x FY13E PE, a marginal discount to HUL, while we forecast an
EPS CAGR for Colgate of 17.4% over FY11-13 versus 13.4% for HUL. We
believe Colgate deserves to trade at a premium to its peers due to: 1) its superior
pricing power; 2) higher potential for product expansion; 3) higher brand
value/power (source: The Economic Times) and; 4) much lower raw material
price sensitivity.
Key catalysts
EPS upgrades. We believe consensus downgraded EPS in FY11 because the
company’s tax incentives at the Baddi manufacturing unit were lowered. We
think there will be EPS upgrades for Colgate as: 1) there is positive momentum
for all new product launches; 2) management has now stated that it will launch
more oral care products and other segments from the parent’s brand portfolio;
and 3) the expected imminent launch of toothpaste by PG has not occurred;
when the product is launched, pricing, distribution availability and marketing
intensity will need to be monitored closely.
Management has mentioned that the growth in the premium segment is stronger
than the mass-market segment, aiding margin expansion in the business. We
forecast an EPS CAGR of 17.4% over FY11-13 versus 13.4% for HUL.
Sustained volume growth. Having been a market leader in the toothpaste
category for the past 70+ years, Colgate has a wide following and an extremely
loyal customer base, shown by the fact that Colgate has gained market share over
the past two to three years despite competition in the oral care segment. The
company’s toothpaste volume rose 13.2% versus market growth of 11.1% in CY
2010.
Colgate’s better distribution reach into rural India should ensure that it grows
faster than competition and gains market share as well. We believe this will
ensure that the company remains the market leader in the toothpaste category for
the foreseeable future. Colgate will also be the key beneficiary of the expected
up-trading, in our view.
Increase in market share. Colgate has maintained market share in the
toothpaste segment even with new launches from competitors. The company has
relied on innovation in times of fierce competition and maintained its position as
the market leader. Its volume market share increased from 49.4% in 2008 to
53.1% in 2010.
Table 1: Colgate: urban/rural market shares (%)
Toothpaste market share (%) March moving avg. total 2010 March moving avg. total 2011
All India 52.9 53.1
Urban market share 52.4 52.9
Rural market share 53.7 53.6
Source: Company data
Delayed or aborted competitive action. Any indication from global MNCs
(globally Colgate and P&G are competitors in the oral care business) that their
entry into the oral care market in India will be delayed or aborted would be a
catalyst for the share price, in our view. In our opinion, consensus has built in an
overly negative view on new competition in the segment.
Awareness and improvements in oral hygiene. The per capita consumption of
toothpaste in India is 127g, which is very low even compared with Asian
countries like China at 225g and Malaysia at 304g. This indicates high growth
potential for the Indian market, as consumers become more aware of oral
hygiene.
The oral care market is one of the least penetrated of the personal care categories
in India. Less than 80% of urban Indians use toothpaste; and less than 10% of
them use it twice a day.
The penetration level in rural markets is even lower; less than 40% of rural
Indians use toothpaste. A significant portion of the rest use toothpowder. In the
past few years with the introduction of discount toothpastes many toothpowder
users have migrated to toothpaste, even as the toothpowder category attracted
new users.
Risks
We believe the risks to our forecasts are: 1) potential high competition from
MNCs; 2) lower-than-expected volume growth; 3) ‘destructive’ spending by the
company (higher promotions; etc); and 4) management errors.
Valuation and basis for our price target
Price target derivation
We initiate coverage with a Buy rating and a price target of Rs1,250.00. We
derive our price target from a DCF-based methodology and explicitly forecast
long-term valuation drivers using UBS’s VCAM tool. Our key assumptions are
a WACC of 11% and a beta of 0.55. At our price target, the shares trade at 30x
FY13E PE. Colgate is currently trading at 23.8x FY13E PE.
Colgate-Palmolive India
Colgate-Palmolive India is the leading oral care company in India with a 51%
share of the toothpaste market. Oral care contributes to 96% of sales and
personal care 2%. It has a wide distribution network with 1,713 direct stores and
about 4 million indirect stores. Colgate’s rural market contributes 40% of sales.
Statement of Risk
We believe the key risks to Colgate’s earnings are loss of market share due to
increased competition, commodity price risk, an inability to pass on price
increases in an increasingly competitive market, the risk of a single segment
focus, and a change in tax rates in locations designated as tax benefit zones.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
UBS Investment Research
Colgate-Palmolive India
T he power of the brand [EXTRACT]
We initiate coverage with an anti-consensus Buy rating
Colgate-Palmolive India (Colgate) is the leading oral care products company in
India with a 51% share of the toothpaste market in FY11. We initiate coverage
with an anti-consensus Buy rating, as we believe Colgate will benefit from: 1)
consumer upgrades; 2) a high market growth opportunity; 3) its strong distribution
network; and 4) powerful brand equity.
Product launches from parent portfolio a key trigger
The product pipeline in the next two to three years is a key reason for our positive
view on the company. We believe Colgate intends to diversify from the oral care
segment by launching products from the parent’s portfolio. Colgate currently
derives 95% of revenue from the oral care segment while the parent derives 43%;
we believe this needs to change and that it will be the key focus of management.
Competition to have a limited impact
Due to the ‘unorganised’ retail segment and well-entrenched brands, we believe a
new competitor will take share from the local brands rather than from the national
market leader. We forecast Colgate to grow volume 11-12% over FY12-15, despite
new competition, and that additional ad spend increases volumes in the segment
thereby benefiting Colgate, which has the widest distribution reach and the
strongest brand name.
Valuation: price target of Rs1,250.00
We derive our price target from a DCF-based methodology and explicitly forecast
long-term valuation drivers using UBS’s VCAM tool. We assume a WACC of
11% and a beta of 0.55.
Investment Thesis
We initiate coverage of Colgate-Palmolive India (Colgate) with an anticonsensus
Buy rating and a price target of Rs1,250.00. Colgate is the market
leader in the oral care segment with a 51% market share in FY11. We believe
Colgate is well-positioned to benefit from: 1) consumers up-trading from
toothpowder to toothpaste, especially in rural India; 2) a large market
opportunity in the form of a highly underpenetrated toothpaste market in India;
3) strong brand equity; and 4) Colgate’s distribution network that consists of
1,713 direct sales stores and about 4.5m indirect stores (third-party distribution).
Colgate’s parent derives just 43% of revenue from the oral care segment while the
Indian subsidiary derives 95% from the segment. We believe Colgate will
diversify from oral care by launching products from the parent’s portfolio.
Since 2004 we have noted aggressive competition between Hindustan Unilever
(HUL) and Proctor & Gamble (PG) in the detergents segment. While the market
leader (HUL) has not ceded market share, PG has gained share from the ‘tail’ of
the segment, ie, regional and local brands. We believe competition will have a
limited effect on Colgate’s business model. It should be able to maintain market
share despite new launches from competitors, as additional media coverage of a
new launch typically increases volume in the category which, in turn, benefits
the segment leader with the best distribution reach and the strongest brand. We
believe a new competitor will gain at the expense of the tail of the market, as
there is a move from local to national level brands.
We forecast Colgate will grow volume at 11-12% over FY12-15, and will be
able to pass on price increases on the strength of its brand. Colgate is currently
trading at 23.8x FY13E PE, a marginal discount to HUL, while we forecast an
EPS CAGR for Colgate of 17.4% over FY11-13 versus 13.4% for HUL. We
believe Colgate deserves to trade at a premium to its peers due to: 1) its superior
pricing power; 2) higher potential for product expansion; 3) higher brand
value/power (source: The Economic Times) and; 4) much lower raw material
price sensitivity.
Key catalysts
EPS upgrades. We believe consensus downgraded EPS in FY11 because the
company’s tax incentives at the Baddi manufacturing unit were lowered. We
think there will be EPS upgrades for Colgate as: 1) there is positive momentum
for all new product launches; 2) management has now stated that it will launch
more oral care products and other segments from the parent’s brand portfolio;
and 3) the expected imminent launch of toothpaste by PG has not occurred;
when the product is launched, pricing, distribution availability and marketing
intensity will need to be monitored closely.
Management has mentioned that the growth in the premium segment is stronger
than the mass-market segment, aiding margin expansion in the business. We
forecast an EPS CAGR of 17.4% over FY11-13 versus 13.4% for HUL.
Sustained volume growth. Having been a market leader in the toothpaste
category for the past 70+ years, Colgate has a wide following and an extremely
loyal customer base, shown by the fact that Colgate has gained market share over
the past two to three years despite competition in the oral care segment. The
company’s toothpaste volume rose 13.2% versus market growth of 11.1% in CY
2010.
Colgate’s better distribution reach into rural India should ensure that it grows
faster than competition and gains market share as well. We believe this will
ensure that the company remains the market leader in the toothpaste category for
the foreseeable future. Colgate will also be the key beneficiary of the expected
up-trading, in our view.
Increase in market share. Colgate has maintained market share in the
toothpaste segment even with new launches from competitors. The company has
relied on innovation in times of fierce competition and maintained its position as
the market leader. Its volume market share increased from 49.4% in 2008 to
53.1% in 2010.
Table 1: Colgate: urban/rural market shares (%)
Toothpaste market share (%) March moving avg. total 2010 March moving avg. total 2011
All India 52.9 53.1
Urban market share 52.4 52.9
Rural market share 53.7 53.6
Source: Company data
Delayed or aborted competitive action. Any indication from global MNCs
(globally Colgate and P&G are competitors in the oral care business) that their
entry into the oral care market in India will be delayed or aborted would be a
catalyst for the share price, in our view. In our opinion, consensus has built in an
overly negative view on new competition in the segment.
Awareness and improvements in oral hygiene. The per capita consumption of
toothpaste in India is 127g, which is very low even compared with Asian
countries like China at 225g and Malaysia at 304g. This indicates high growth
potential for the Indian market, as consumers become more aware of oral
hygiene.
The oral care market is one of the least penetrated of the personal care categories
in India. Less than 80% of urban Indians use toothpaste; and less than 10% of
them use it twice a day.
The penetration level in rural markets is even lower; less than 40% of rural
Indians use toothpaste. A significant portion of the rest use toothpowder. In the
past few years with the introduction of discount toothpastes many toothpowder
users have migrated to toothpaste, even as the toothpowder category attracted
new users.
Risks
We believe the risks to our forecasts are: 1) potential high competition from
MNCs; 2) lower-than-expected volume growth; 3) ‘destructive’ spending by the
company (higher promotions; etc); and 4) management errors.
Valuation and basis for our price target
Price target derivation
We initiate coverage with a Buy rating and a price target of Rs1,250.00. We
derive our price target from a DCF-based methodology and explicitly forecast
long-term valuation drivers using UBS’s VCAM tool. Our key assumptions are
a WACC of 11% and a beta of 0.55. At our price target, the shares trade at 30x
FY13E PE. Colgate is currently trading at 23.8x FY13E PE.
Colgate-Palmolive India
Colgate-Palmolive India is the leading oral care company in India with a 51%
share of the toothpaste market. Oral care contributes to 96% of sales and
personal care 2%. It has a wide distribution network with 1,713 direct stores and
about 4 million indirect stores. Colgate’s rural market contributes 40% of sales.
Statement of Risk
We believe the key risks to Colgate’s earnings are loss of market share due to
increased competition, commodity price risk, an inability to pass on price
increases in an increasingly competitive market, the risk of a single segment
focus, and a change in tax rates in locations designated as tax benefit zones.
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