Colgate-Palmolive (India) - Q3FY14 Results Update - Margins under pressure :: Centrum

Rating: Hold; Target Price: Rs1,250; CMP: Rs1,310; Downside: 5%



Margins under pressure



We maintain Hold rating on Colgate and believe A&P spends could
increase as competitive intensity in the oral care category continues
to remains high impacting margins as seen in Q3FY14 results.
Advertising and other expenses grew by 21.6% YoY and 32% YoY
respectively lowering operating margins by 67bps despite gross margin
expansion of 80bps. However, the company was able to increase its
market share in competitive category with 11% volume growth in the
toothpaste category. We expect the overhang and uncertainty to
continue for the next couple of quarters and impact valuations as seen
in the past 6 months where the stock under-performed the FMCG index
and corrected by 12%

$ Robust revenues, but margins under pressure: Colgate posted robust
15.9% sales growth on the back of strong 10% YoY overall volume growth
and 11% volume growth in the toothpaste category on low base. Revenue
was at Rs8840mn, 1.3% below expectations. Operating profit was at
Rs1434mn up by 11.3%YoY (1.8% below expectations) as operating margin
contracted by 67bps due to higher advertising and other expenditure.
Adj. PAT was at Rs1129mn, (up 1.7% YoY) 3.2% below expectations as
adj. tax rate for the company was high at 27%

$ Double digit volume growth in toothpaste category: The company
posted 10% overall volume growth led by the toothpaste category which
grew by 11%. Even after regular price hikes and stiff competition, the
company has been able to achieve double digit volume growth in the
toothpaste category. Flagship brands such as ‘Colgate Dental Cream’,
‘Active Salt’, ‘Max Fresh’, and ‘Colgate Total’ along with recently
launched ‘Visible White’ contributed to this growth. Volume market
share in the toothpaste category continues to increase and was at 56%
in Jan-Dec ’13 against 54.5% in Jan-Dec ’12 on the back of
premiumisation of products. Market share in the toothbrush category
also increased to 41.5% against 39.8% as the company has been
aggressive with multiple launches

$ High A&P spends impact margins: Despite gross margin increase of
80bps to 60.9% during the quarter, operating margins declined by 67bps
to 16.2%. Advertising spends for the company increased 21.6% YoY while
admin and other expenses which includes promotion expenses increased
by 32% YoY following high competitive intensity in the oral care
category. We expect high intensity to remain for a few quarters with
Colgate maintaining its share of voice to defend its market share

$ Maintain Hold: We have lowered our earnings estimate by 1.1%/1.2%
for FY14/FY15 on the back of lower volume growth and high A&P spends.
Colgate is currently trading at 34.9x and 29.5x FY14E and FY15E
respectively and we maintain Hold rating on the stock with a revised
target price of Rs1250 (25x Dec 2015). The stock has underperformed
the FMCG index and corrected ~12% in the last 6 months on the back of
concerns of increased competition and high A&P spends. Key downside
risk could be further increase in A&P spends and loss of market share
impacting volume growth while upside risk could be lower competitive
intensity improving margins.





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