Colgate Palmolive - Margins below estimates- Sell : Religare

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Colgate Palmolive (India) Ltd
Margins below estimates
Colgate-Palmolive India’s (Colgate) results were below our estimates with
Sales/EBITDA/Adj PAT growth of 13.2%/17.2%/11.8% against our estimate of
15.6%/24.7%/18.2%. Total sales increased by 13.2% YoY to Rs 5.6bn in
Q2FY11, led largely by volume growth. Toothpaste volumes grew 12%,
whereas growth in the toothbrush segment was stronger at 24%. EBITDA
margins were below estimates on account of higher personnel and other
expenses, although A&P costs remained in check and gross margins improved
YoY. PAT growth for the quarter was limited to 11.8% YoY owing to higher
depreciation and tax outgo. Colgate is currently trading at 270x and 24.9x
FY11E and FY12E earnings respectively. We maintain our SELL rating with a
revised September ’11 price target of Rs 860 (rolling forward earnings from
March ’12 to September ’12 and reducing FY11/FY12 earnings by 2.1/5.0%).

Revenues in line with estimates: Colgate’s revenues for Q2FY11 increased by
13.2% YoY to Rs 5.6bn, in line with our estimates. The company achieved
volume growth of 13%, with the toothpaste segment growing at 12%. The volume
market share in toothpaste improved to 53.3% in the January–September ’10
period compared to 52% in the same period last year. All the flagship brands,
Colgate Dental Cream, Active Salt, Max Fresh and Cibaca, contributed to volume
growth, while new product Colgate Sensitive also performed well.

In the toothbrush category, volumes grew by 24% with volume market share
improving to 40.5% (Jan-Sep ’10) versus 38.9% (Jan-Sep ’09). The share in the
toothpowder category at 48% (Jan-Sep ’10) was, however, slightly lower than the
same period last year. In the mouthwash category, Plax improved its share to
16.3% (Jan-Sep ’10) from 6.4% (Jan-Sep ’09).

Margins fall short of expectations: EBITDA grew by 17.2% YoY to Rs 1.3bn with
an operating margin of 22.8%, up 80bps YoY. The gross profit margin improved by
260bps YoY. The company managed to curtail its A&P expenses by 250bps YoY to
13.9% with absolute A&P expenses declining by 4% YoY to Rs 789mn. However,
personnel costs and other expenses increased by 200bps and 240bps respectively
which led to below-estimated operating margins. Adjusted PAT increased by
11.8% YoY to Rs 1bn with net margins declining by 20bps YoY to 17.6%.

Price target revised to Rs 860, maintain SELL: Colgate is currently trading at a
P/E of 27x and 24.9x FY11E and FY12E earnings respectively. We reduce our
FY11 and FY12 earnings estimates by 2.1% and 5.0% to factor in lower revenue
growth. We also roll forward our valuations on the stock to September ’12
earnings. Our revised September ’11 price target works out to Rs 860 (previous
target Rs 850). We maintain a SELL rating on Colgate.