Volume recovers, margin expands… • Colgate Palmolive :: ICICI Securities, pdf link

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Volume recovers, margin expands…
• Colgate Palmolive’s Q2FY15 numbers were marginally below our
estimate on both sales & earnings front. Net sales grew 10.9% to
| 993.6 crore (I-direct estimate: | 1036.7 crore) led by strong 7%
volume growth in toothpaste
• Operating margins increased 240 bps to 18.6% mainly on account of
softening raw material cost & overhead expenses despite a sharp
increase in marketing cost
• Market share (January-September 2014) in toothpaste rose to 56.7%
vs. 55.9% YoY while in toothbrush it was up to 42.6% vs. 41.5% YoY
Market share continues to strengthen!
Colgate Palmolive (CPIL) is the largest player in the oral care segment in
India with the market share (June, 2014) of 57% in toothpaste and 42.6%
in toothbrush category. In spite of Procter & Gamble’s (P&G) re-entry into
the toothpaste segment in India in June, 2013 (brand: Oral B), CPIL’s
market share has only strengthened. CPIL has increased its market share
in toothpaste from 54.7% in June, 2012 to 57.1% in April, 2014. Similarly,
the market share in toothbrush has also increased from 38.7% to 42.3%
for the same period. We believe the second largest player in the
toothpaste category, HUL, is losing its market share with Dabur India
inching share from ~10% to ~11% in last two years. Further, regional
players like Vicco, Ajanta, Anchor, Smyle and Baidyanath have also
witnessed a loss in market share in toothpastes. The combined share of
all these regional brands has slipped to ~2% (2013) from more than 5%
two years ago and ~ 15% share 10 years back.
Advertisement & promotions continue to ride higher
In the last two years, Colgate has been very aggressive in its A&P activity
especially after P&G’s launch of Oral-B toothpaste and GSK consumer
expanding its market presence in the sensitive toothpaste category. The
A&P expenditure for Colgate has increased to 19.4% of sales in FY14 and
20% in Q2FY15 from 15-16% earlier. We expect the company to maintain
a higher A&P expense to maintain its market share and push new
launches. We have modelled A&P expenses of 19% in FY15E and 18% of
sales in FY16E and FY17E, respectively.
Innovations at forefront
Over the years, Colgate has built an extensive oral care portfolio through
constant innovation, thereby offering products across the value pyramid
and within each sub-category (sensitive toothpaste, gum care toothpaste,
electric brush, kids brush, etc). Lately, it has been aggressive on
extension of its premium portfolio to capture the up-trading consumers.
In FY14, it launched two varieties of toothpastes (Active healthy White,
Max Fresh Tea) and Slim Soft Toothbrushes. In June, 2014 CPIL launched
Max Protection Plus Sugar Acid Neutralizer toothpaste. Hence, with
constant innovations and higher A&P spends, we believe Colgate would
continue to remain the dominant player and be the largest beneficiary of
increasing penetration levels in the country (currently at ~75%).
Earnings growth to remain healthy; maintain HOLD
Led by CPIL’s constant effort to innovate its portfolio and drive
premiumisation in oral care, we expect margins to improve to 19.9% by
FY17E aiding healthy profitability growth of 11.4% CAGR (FY14-17E). We
value the stock on triangulated valuation method (DCF, EV/EBITDA and
price/sales) and arrive at a target price of | 1919/share.


LINK
http://content.icicidirect.com/mailimages/IDirect_Colgate_Q2FY15.pdf