Colgate-Palmolive (India) Sell Target Price: Rs1,023 :Centrum

Colgate-Palmolive (India)

Sell

Target Price: Rs1,023

CMP: Rs1,139         

Downside: 10%

Strong volume growth continues

Colgate-Palmolive posted strong 18% revenue growth in Q4FY12 on the back of 13% volume growth in its core toothpaste category. Higher gross margins led to margin expansion and strong 15% PAT growth. We believe premium valuations are not sustainable and hence maintain SELL on the stock.  

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m  Robust growth: Colgate posted robust 18% sales growth on the back of strong 13% YoY volume growth in the toothpaste category with revenue at Rs6859mn (up 18% YoY and 2.4% QoQ). With significant margin expansion on the back of price hikes, PAT was higher than expected at Rs1307mn (up 14.6% YoY and 13% QoQ).

m  Strong growth across categories: For the 16th consecutive quarter the company posted a double digit volume growth of 11% led by the toothpaste category. Even tough the company hiked prices in FY12, volume growth has only got stronger. Market share in toothpaste is the highest in the past few years at 54%. Premiumisation of products is helping the company gain market share in the toothpaste category. Market share in higher price point products such as mouthwash grew to 26%.  

m  Margin expansion: Operating margins of the company expanded by 82bps YoY and 301bps on a sequential basis to 22.3%. Gross profit margins have expanded by 107bps on the back of price hikes by the company. The management has reclassified A&P expenses and now only advertising falls within the category while promotion is being accounted in other expenses. Hence advertising expenses increased by 14%YoY while employee cost and other expenses were each up by 20%YoY.

m  Other highlights: The company is in the process of setting up a new toothpaste manufacturing facility in Sanand, Gujarat that should be operational in FY13. It has paid a dividend of Rs25 per share in FY12 and has 76% dividend payout ratio compared to 74.3% in FY11. Tax rate for the company is expected to be ~27% in FY13 that is set to increase by 200bps in FY14 on account of lower tax benefit.

m  Estimates increased; Maintain SELL: We have increased our FY13/FY14 estimates factoring in higher volume and price growth coupled with higher gross margins. The stock is currently trading at 29.3x FY13E and 25.5x FY14E which is ~10% above its historical average. We do not believe such premium valuations will sustain and hence maintain Sell rating with a revised target price of Rs1023 (23x FY14E).