Colgate Palmolive -Almost Flawlessly Executed in 2QFY11: Citi

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Colgate Palmolive (India) (COLG.BO)
Balancing Act... Almost Flawlessly Executed in 2QFY11
 Steady volumes encouraging... — Revenue growth of ~13% Y/Y to Rs5.7bn
remained healthy, driven almost entirely by volumes. Toothpaste & toothbrushes
volume growth of 12% & 24% Y/Y respectively remained healthy. Improving
market share trends, esp. toothpaste (+130bps Y/Y to ~53.3% YTD CY10), are
encouraging. Volume shares in toothbrushes and mouthwash also increased YoY
to 40.5% and 16.3% respectively; while toothpowder was slightly lower at 48%.
 ... However, PAT growth below expectations — PAT at Rs1bn rose ~12% Y/Y,
below our and Street forecasts of Rs1.1/1.07bn. This was driven by ~80bps Y/Y
increase in EBITDA margins to 22.8%, which contracted 630bps QoQ. We note
that the reported gross margins (61%, +~260bps Y/Y) and SGA (+35% Y/Y) aren’t
comparable with the previous year, given distortions arising from the
amalgamation of Professional Oral Care Products and CC Healthcare Products.
 Ad spends decline YoY — Margins were supported by lower ad spends during the
Q –down 4% Y/Y (-255bps Y/Y). We note that 3Q may however be impacted given
the timing of the Oral Health Month and the festive season.
 We remain sellers — Profit growth over the next two years is likely to be impacted
by higher tax outgo (effective tax rate is likely to increase to 22-25%), decelerating
revenue growth and increasing competition from Hindustan Unilever and Dabur.
The risk of P&G’s entry – and the subsequent de-rating - is also not adequately
priced in, in our view. We increase our multiple to 24x from 23x in line with peers
and roll forward to Mar12E from Sept11E and our target price increases to Rs870
(from Rs812 earlier). Colgate's relative PE to the broad market is currently at
1.45x, i.e., at the higher end of the last five-year range of 0.8x-1.6x, thus the risk
reward at current levels appears unfavorable.
 Upside risks — Key risks to our Sell recommendation include: 1) Ad expenses
substantially lower than forecast, and 2) further margin expansion, driven by
amalgamation of contract manufacturers.