Strong volume growth continues Colgate-Palmolive : Centrum Research

Strong volume growth continues
Colgate-Palmolive posted strong 20.5% revenue growth in Q1FY13 on the
back of 11% volume growth. Gross margins continued to be healthy at 59%
while increasing competitive intensity boosted advertising spending by 32%
YoY. High tax rate muted PAT growth to 17% YoY. We believe premium
valuations are not sustainable and hence maintain Neutral view on the stock.
Robust growth: Colgate posted robust 20% sales growth on the back of
strong 11% YoY volume growth with revenue at Rs7361mn (up 20.5% YoY
and 7.3% QoQ). With margin expansion on the back of price hikes, operating
profit was at Rs1424mn (up 21.5% YoY but down 7% QoQ). PAT was up by
17% to Rs1174mn.
Market share improves: For the 17th consecutive quarter the company posted
double digit volume growth of 11% led by the toothpaste category. Even after
regular price hikes volume growth continued. Market share in toothpaste was the
highest in the past few years at 54%. Premiumisation of products is helping the
company gain market share in the toothpaste category. In mouth wash category the
recent launch of the Colgate Plax Fresh Tea continued to enhance sales. Market share
in the toothbrush category was at 38.2% against 36.3% last year.

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Margin expands: Operating margins of the company expanded by 16bps YoY
but was down 294bps on a sequential basis to 19.4%. Gross profit margins
have remained stable at 59.3%. Advertising expenses increased by 32%YoY on
the back of strong competition from players such as HUL, Dabur and GSK.
Employee cost was up 25% YoY.
Other highlights: During the quarter the company continued to launch new
products across categories. In the toothbrush category it launched Colgate
360 battery toothbrush and Colgate Max Fresh Toothbrush. The company
recently acquired a plot of land in Andhra Pradesh on long term lease for
setting up a toothbrush manufacturing facility. Tax rate for the company was
high during the quarter at 28% against 27.3% in Q1FY12 and 24.3% in Q4FY12.
Maintain Neutral: The stock is currently trading at 29.4x FY13E and 25.6x
FY14E which is ~10% above its historical average. We do not believe such
premium valuations will sustain in the long run and expect competition to
become aggressive. Hence we maintain Neutral rating with a target price of
Rs1142 (25x FY14E).