Colgate India Steady growth continues; Buy:: BofA ML

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Colgate India
Steady growth continues; Buy
􀂄 Sep Q profit growth slow but outlook steady; Maintain Buy
Net profit of Rs1bn was up 12% yoy but 3% below our est. Key surprise was
marginally lower sales growth and lower than expected margin gain. While
volume growth in toothpaste remains strong at 12%, there is some slowdown in
the category which hit topline growth. Also, 1H costs involved in merger of
Hyderabad based supplier have been taken completely in this qtr which has hit
margins temporarily. We have tweaked our FY11-12E est by ~1-2% and expect a
healthy 16% EPS CAGR. Maintain Buy on steady business fundamentals.
Sales growth remains healthy; Expect improvement in 2H
Colgate sustained a reasonable 13% sales growth in Sep Q. We estimate sales
growth of ~14-15% for FY11-12E. Increased rural focus of last few years will pay
off as rural demand is expected to surge in 2HFY11 post the strong monsoons.
Volume growth in Toothpaste and Toothbrush remains strong. Also, volume
market share gain of ~150bp in both these categories is encouraging.
Margin hit temporary; Rise in competition not visible
Colgate gained 80bp EBITDA margin due to improved gross margin on integration
of suppliers in Goa and Hyderabad. Also, A&P spend continues its downward
move with 250bp decline. There is no visibility yet on entry of P&G as it appears
occupied with launch of unrelated categories. Sep Q margin gain missed our est
as employee and overhead costs for 1H for Hyderabad unit were taken in Sep Q
itself. Going forward we expect an improvement of upto 100bp on account of this.
Strong business fundamentals to sustain valuations
Business fundamentals remain strong as 1) sales growth and market share gains
should sustain 2) merger of key suppliers should drive margins. With low visibility
of P&G’s foray, competition looks manageable. We therefore expect current