Surge in volume growth
Colgate posted Q4FY13 revenues above expectations with 18.3%YoY (2.4% above expectations) growth on the back of 11%YoY volume growth in the toothpaste category and 12% (8% in Q3FY13) overall, coupled with market share gain across categories. Operating profit was down by 2.7% YoY (15.2% below expectations) on the back of higher admin and A&P spends. Adj PAT was down by 5.8% YoY to Rs1232mn. We maintain Neutral rating on the back of steep valuations and increasing competitive intensity which will mute margin expansion.
Robust revenues but margins under pressure: Colgate posted 18.3% revenue growth to Rs8116mn on the back of 12%YoY overall volume growth and 11% (v/s 10% expectation) in the toothpaste category. Operating profit was at Rs1487mn down by 2.7%YoY as operating margin contracted by 397bps. PAT was at Rs1232mn (down 5.8% YoY) 15.7% below expectations.
Volume growth returns: Volume growth in the toothpaste category was 11%YoY against 8% in the last quarter as market share increased by 130bps to 55.4% from 54.1% last year. Toothbrush market share also improved from 37.7% to 41.5% during the quarter, while mouthwash market share was at 26.5%, up 30bps YoY.
Increasing focus on premiumisation: 2.5-3% of the growth was on account of premiumisation and change in product mix during the quarter. The company is slowly upgrading its premium product offerings to customers as Sensitive toothpaste market will now have a 5% market share. Products such as Colgate Visible White, Colgate Total Pro Gum Health, Colgate Sensitive Pro-Relief Multi-Protection, Colgate Max Fresh Ice and Colgate Total Advance were some of the launches during the year. The company has also been aggressive in the toothbrush space with multiple new launches.
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Colgate posted Q4FY13 revenues above expectations with 18.3%YoY (2.4% above expectations) growth on the back of 11%YoY volume growth in the toothpaste category and 12% (8% in Q3FY13) overall, coupled with market share gain across categories. Operating profit was down by 2.7% YoY (15.2% below expectations) on the back of higher admin and A&P spends. Adj PAT was down by 5.8% YoY to Rs1232mn. We maintain Neutral rating on the back of steep valuations and increasing competitive intensity which will mute margin expansion.
Robust revenues but margins under pressure: Colgate posted 18.3% revenue growth to Rs8116mn on the back of 12%YoY overall volume growth and 11% (v/s 10% expectation) in the toothpaste category. Operating profit was at Rs1487mn down by 2.7%YoY as operating margin contracted by 397bps. PAT was at Rs1232mn (down 5.8% YoY) 15.7% below expectations.
Volume growth returns: Volume growth in the toothpaste category was 11%YoY against 8% in the last quarter as market share increased by 130bps to 55.4% from 54.1% last year. Toothbrush market share also improved from 37.7% to 41.5% during the quarter, while mouthwash market share was at 26.5%, up 30bps YoY.
Increasing focus on premiumisation: 2.5-3% of the growth was on account of premiumisation and change in product mix during the quarter. The company is slowly upgrading its premium product offerings to customers as Sensitive toothpaste market will now have a 5% market share. Products such as Colgate Visible White, Colgate Total Pro Gum Health, Colgate Sensitive Pro-Relief Multi-Protection, Colgate Max Fresh Ice and Colgate Total Advance were some of the launches during the year. The company has also been aggressive in the toothbrush space with multiple new launches.
Operating margins under pressure: Operating margin during the quarter was down by 397bps due to 40%YoY increase in advertising expenses on the back of higher competitive intensity, 27%YoY increase in other expenditure due to hike in fuel and power costs while employee cost was up 34%YoY on the back of one time cost pertaining to the sales force. However, gross margins for the company was up by 36bps on the back of benign commodity prices. Going forward, to maintain and expand market share, the company will continue to invest heavily in A&P post entry of P&G.
Other highlights: Currently, the company’s distribution reach is 5.14mn stores compared to 4.3mn stores in 2010. The company has declared a total dividend of Rs28/share for FY13. It has sold its ‘Global Shared Services Organization’ division by way of slump sale to Colgate Global Services Pvt Ltd w.e.f June 1, 2013 for Rs599mn. Revenues of this division were ~Rs679mn in FY12 and ~Rs750mn in FY13 with operating margins of mere 5%.
Estimates revised; Maintain Neutral: We are marginally reducing our revenue and PAT estimates while margins have been increased following the sale of GSSO division. Colgate is currently trading at 34.4x and 29.9x FY14E and FY15E EPS of Rs42.8 and Rs49.3 respectively. We maintain our Neutral view on the stock with a target price of Rs1381 (30x Sept 14) and believe with increasing competitive intensity, and higher A&P spends muting margin expansion, pricing power could be lower.
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