Consolidating market share… • Colgate Palmolive’s Q3FY15 results update :: ICICI Securities, report

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Consolidating market share… • Colgate Palmolive’s Q3FY15 results were below our estimates on the topline front and in line on the earnings front. Net sales witnessed 11.8% growth led by 5% volume growth in toothpaste • Operating margins expanded 265 bps mainly due to 232 bps saving in raw material & 260 bps saving in A&P spend that was partially set off by higher employee expense & other overhead expense. Net profit rose 16% to | 130.9 crore despite higher tax outgo • Market share (Jan-Dec’14) in toothpaste increased to 56.7% against 55.9% YoY while in toothbrush it increased to 42.4% vs. 41.6% YoY Market share continues to strengthen! Colgate Palmolive (CPIL) is the largest player in the oral care segment in India with a market share (June, 2014) of 57% in toothpaste and 42.6% in the toothbrush category. Despite Procter & Gamble’s (P&G) re-entry into the toothpaste segment in India in June, 2013 (brand: Oral B), CPIL’s market share has only strengthened. CPIL has increased its market share in toothpaste from 54.7% in June, 2012 to 57.1% in April, 2014. Similarly, the market share in toothbrush has also increased from 38.7% to 42.3% for the same period. We believe the second largest player in the toothpaste category, HUL, is losing its market share with Dabur India inching up its share from ~10% to ~11% in the last two years. Further, regional players like Vicco, Ajanta, Anchor, Smyle and Baidyanath also witnessed a loss in market share in toothpastes. The combined share of all these regional brands has slipped to ~2% (2013) from more than 5% two years ago and ~15% share 10 years back. Advertisement & promotions continue to ride higher In the last two years, Colgate has been very aggressive in its A&P activity especially after P&G’s launch of the Oral-B toothpaste and GSK Consumer expanding its market presence in the sensitive toothpaste category. The A&P expenditure for Colgate has increased to 19.4% of sales in FY14 and 18% in Q3FY15 from 15-16% earlier. We expect the company to maintain a higher A&P expense to maintain its market share and push new launches. We have modelled A&P expenses of 19% in FY15E and 18% of sales in FY16E and FY17E, respectively. Innovations at forefront Over the years, Colgate has built an extensive oral care portfolio through constant innovation, thereby offering products across value pyramid and within each sub-category (sensitive toothpaste, gum care toothpaste, electric brush, kids brush etc.). Lately, it has been aggressive on extension of its premium portfolio to capture the up-trading consumers. In FY14, it launched two varieties of toothpastes (Active Healthy White, Max Fresh Tea) and Slim Soft Toothbrushes. In June, 2014 CPIL launched Max Protection Plus Sugar Acid Neutralizer toothpaste. Hence, with constant innovations and higher A&P spends, we believe Colgate would continue to remain the dominant player and be the largest beneficiary of increasing penetration levels in the country (currently at ~75%). Earnings growth to remain healthy; maintain HOLD Led by CPIL’s constant effort to innovate its portfolio and drive premiumisation in oral care, we expect margins to improve to 19.9% by FY17E aiding healthy profitability growth of 11.4% CAGR (FY14-17E). We value the stock on triangulated valuation method (DCF, EV/EBITDA and price/sales) and arrive at a target price of | 1919/share.

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 http://content.icicidirect.com/mailimages/IDirect_Colgate_Q3FY15.pdf