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COLGATE 2QFY11: In-line; Toothpaste volumes up 12%; 80bp margin expansion; 12% PAT growth; Neutral
Colgate Palmolive’s (CLGT IN, Mkt Cap USD2.6b, CMP Rs873, Neutral) 2QFY11 results are in-line.
- Net sales grew 13.2% to Rs 5.5b (est Rs5.5b) led by toothpaste volume growth at 12% (also in-line).
- Gross margin expanded 270bp to 60.1% (est 61.3%) as price increases have been able to fully offset input cost pressure.
- Ad spend declined 4% to Rs 789m; 14.3% of sales vs 16.9% in 2QFY10.
- EBITDA margin expanded 80bp to 22.8% (est 24.1%); EBITDA grew 17.1% to Rs1.3b (est Rs1.37b). Lower growth in EBITDA was due to higher staff costs and other expenses which increased by 200bp and 250bp, respectively.
- Lower than expected tax rate (22.1% vs est 24.2%) enabled Adj PAT growth of 11.8% to Rs 1b (est Rs1b).
Toothpaste volume up 12%; market share up 130bp to 53.3%
- 2QFY11 volume growth stood at 13% with the toothpaste volumes growing by 12%. Toothbrush reported 24% volume growth.
- Management strategy of focusing on oral care with a portfolio across price points and sub-segments continues to enable strong volume growth.
- Colgate reported 53.3% volume market share in Jan-Sep’10 period vs 52% in Jan-Sep’09 (130bp gain YoY). Toothbrush market share increased 160bp during the same period. The company, however, lost some market share in the toothpowder segment (48% in Jan-Sep’10).
- The company is investing aggressively in the emerging mouth wash category, with market share increasing from 6.4% to 16.3%. We note that globally niche segments like Mouthwash, Dental floss etc emerge as new sub-segments as the oral care market evolves. Colgate expects India to follow the same trend; technical capability of the parent and requisite brands in niche segments will enable the company to tap such opportunities successfully.
- The company initiated its two month long Oral Health Month (OHM) campaign in September, impact of which would be reflected in 3QFY11.
- In its 7th year of operation, OHM aims to reach over 1,000 towns and cities with 23,000 participating dentists (~50% of dentist population).
Lower ad-spend enable 80bp EBITDA margin expansion; Ad-spend likely to pick-up in 2HFY11
- Gross margin expanded 270bp YoY due to benefit of price increase, lower input cost and benefit of subsidiary merger.
- Ad spend during the quarter contracted 260bp to 14.3%; advertising expense declined 4.4% to Rs789m. Staff cost increased 43% YoY (200bp) on account of merger of subsidiaries, the increase in coming quarters is likely to be more sedate.
- We believe ad spend for Colgate has been historically lumpy and the 100bp decline would be partly offset in coming quarters.
P&G entry could spark off advertising/price war, a key risk to earnings; Maintain Neutral
- P&G is widely speculated to enter the Toothpaste category in India either through launch of its global brand Crest or under Oral-B. Our channel check suggests the launch is likely to be in the fag end of 3QFY11. We highlight that JHS Svendgaard is setting up a unit in Baddi for a new entrant whose products are likely to be launched in FY12.
- We don’t rule out the likelihood of intense competitive activity in toothpaste segment in terms of pricing and/or ad-spend. We believe the entry of P&G is a risk to near-term profitability as Colgate would have to increase ad spend/sales promotions to protect its market share.
- We remain positive on the oral care opportunity in India and Colgate’s ability to capitalize on it in the longer run. However, we believe near term pressure on profits due to P&G’s entry is a distinct possibility.
- Our estimates remain unchanged post the quarterly results as the higher staff cost during the quarter gets offset by lower tax rate guidance (23-24% for FY11).
- The stock trades at 22.6x FY12E EPS of Rs38.6. Neutral.
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