Colgate-Palmolive (India)
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- Stephen Phillip Harmon
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1 Result Update Colgate-Palmolive (India) 27 July 218 Reuters: COLG.BO; Bloomberg: CLGT IN Tough Times Continue Colgate-Palmolive (India) or CLGT reported a mixed earnings performance in. Volume and revenue growth again disappointed our as well as consensus estimates. Volume growth of just 4% on a favourable base clearly reflects the competitive challenges that the market leader is facing and low growth rate in the oral care category. Revenues were around 2% below overall expectations. The surprise came on the profitability side wherein EBITDA grew 7% above our expectations. This was mainly because CLGT has cut down heavily on media spending and other overheads. In our opinion, curtailed media spending shows lack of confidence on the part of the market leader to invest in a category which is growing in low mid single-digit and with highly competitive challenges. CLGT continued to lose market share in both toothpaste and toothbrush segments. In our opinion, consistent loss of market share in the toothpaste segment indicates CLGT s poor innovation pipeline compared to peers. We believe that deficit in the monsoon this year will hurt the growth of CLGT, considering its high share in rural marke. Also, wholesale dependence continues to remain a challenge. Therefore, after revision of our estimates downwards, we have retained Accumulate rating on CLGT with a revised target price of Rs1,2 based on FY2E EPS and P/E of 4x, indicating an upside of 11% from the CMP. Weakness in volume continues: CLGT, in reported volume growth of 4%, which was around 2% below overall expectation. This growth was on a favourable base of a negative 5%. The management indicated that naturals portfolio continued its robust growth led by recent launches like Swarna Vedshakti, but its proportion to the overall segment is less and CLGT s premium portfolio is under pressure, declining in the past few quarters. Volume market share for toothpaste and toothbrush segments was 52.4% and 44.6% as against 53.4% and 44.8%, respectively, in the previous quarter. Our concerns on category growth remains as CLGT will find it difficult to retain its market share without adequate marketing expenditure and innovation. Surprise on margin delivery front: Similar to the previous quarter, margin delivery at the operating level was better than our as well as consensus expectations. Gross margin witnessed a 26bps expansion YoY, mainly led by growth of naturals portfolio, pricing and supply chain efficiency. Media spending for the quarter was almost flat and this shows the lack of confidence on the part of the company. EBITDA margin for the quarter was 27%, thereby showing a 44bps YoY improvement. We believe that some of these gains are not tenable as the oral care category has witnessed some price cuts and CLGT has taken select cuts in naturals brand- Swarna Vedshakti. Outlook and valuation: In our opinion, low category growth and competitive pressure remain the key concerns for CLGT. Consistent loss of market share by the market leader reflects the lack of adequate innovation compared to peers. Overall macro environment will also impact the growth rate considering higher rural revenue share and wholesale dependence. Therefore, considering this we have retained Accumulate rating on CLGT after revising our estimates. Our revised target price is Rs1,2 (from Rs1,26 earlier) based on FY2E EPS and earnings multiple of 4x; indicating an upside of 11% from the CMP. ACCUMULATE Sector: FMCG CMP: Rs1,84 Target Price: Rs1,2 Upside: 11% Vijay Chugh Research Analyst vijay.chugh@nirmalbang.com Abhishek Navalgund Research Associate abhishek.navalgund@nirmalbang.com Key Data Current Shares O/S (mn) 272. Mkt Cap (Rsbn/US$bn) 295.1/ Wk H / L (Rs) 1,274/1,6 Daily Vol. (3M NSE Avg.) 455,64 Price Performance 1 M 6 M 1 Yr Colgate- Palmolive (India) (8.8) (4.9) 2.7 Nifty Index Source: Bloomberg Y/E March (Rsmn) YoY QoQ FY17 FY18 YoY Net sales 9,781 1,917 1, (4.6) 39,819 41, COGS 3,584 3,75 3,55 (1.) (5.3) 14,768 14,91.9 % of sales (26bps) (3bps) (15bps) Gross margin % bps 3bps bps Employee costs (1.2) 2,885 3,59 6. % of sales (2bps) 2bps bps Advertising costs 1,434 1,436 1,435.1 (.) 5,117 5, % of sales (9bps) 6bps (3bps) Other expenses 1,818 1,898 1, (1.8) 7,64 7,528 (1.) % of sales (7bps) 5bps (11bps) EBITDA 2,218 3,75 2, (8.4) 9,444 11, EBITDA margin % bps (11bps) bps Depreciation (2.7) 1,332 1, EBIT 1,845 2,67 2, (9.3) 8,112 9, EBIT margin % bps (12bps) bps Other income (26.7) (3.5) Exceptional items - (117) PBT 1,97 2,639 2, ,515 9, Tax ,74 3, Effective tax rate % bps 52bps (11bps) PAT 1,364 1,888 1, ,775 6, PAT margin % bps 9bps bps EPS
2 1QFY17 1QFY16 2QFY16 3QFY16 4QFY16 1QFY17 Exhibit 1: Financial summary Y/E March (Rsmn) FY16 FY17 FY18 FY19E FY2E Net sales 38,682 39,819 41,88 44,28 47,58 YoY growth (2.9) EBITDA 9,382 9,444 11,124 12,156 12,981 EBITDA margin Reported PAT 5,82 5,775 6,851 7,375 8,154 Adjusted PAT 5,82 5,775 6,851 7,375 8,154 EPS YoY change 4.1 (.8) ROCE ROE P/E (x) P/B (x) EV/EBITDA (x) Exhibit 2: Our estimates versus actual performance Y/E (Rsmn) YoY QoQ NBIE estimate Variation Net sales 9,781 1,917 1, (4.6) 1,564 (1.4) EBITDA 2,218 3,75 2, (8.4) 2, EBITDA bps (11bps) bps PAT 1,364 1,888 1, , Exhibit 3: Change in our estimates Y/E March Old estimates New estimates Change (Rsmn) FY19E FY2E FY19E FY2E FY19E FY2E Net sales 45,23 48,849 44,28 47,58 (2.1) (3.7) EBITDA 12,271 13,289 12,156 12,981 (.9) (2.3) EBITDA margin bps 4bps Net income 7,693 8,392 7,375 8,154 (4.1) (2.8) Exhibit 4: Volume growth on a favourable base Exhibit 5: Loss of volume market share continues (5) (1) (15) (12.) (3.) (5.) (.9) Toothpaste Toothbrush (RHS) 2 Colgate-Palmolive (India)
3 1QFY17 1QFY17 Jul-13 Sep-13 Nov-13 Jan-14 Mar-14 May-14 Jul-14 Sep-14 Nov-14 Jan-15 Mar-15 May-15 Jul-15 Sep-15 Nov-15 Jan-16 Mar-16 May-16 Jul-16 Sep-16 Nov-16 Jan-17 Mar-17 May-17 Jul-17 Sep-17 Nov-17 Jan-18 Mar-18 May-18 Jul-18 1QFY17 Exhibit 6: Top-line growth trend Exhibit 7: Operating margin expansion led by cost savings (Rsmn) 12, 1, 8, 6, 4, 2, (8.6) 2.2 (3.5) (5) (1) (Rsmn) 3,5 3, 2,5 2, 1,5 1, Sales Sales growth EBITDA EBITDA margin % Exhibit 8: PAT margin profile Exhibit 9: One-year forward P/E chart (Rsmn) 2, 1,8 1,6 1,4 1,2 1, (x) PAT PAT margin % Forward PE Median P/E +1 SD -1 SD 3 Colgate-Palmolive (India)
4 Financials Exhibit 1: Income statement Y/E March (Rsmn) FY16 FY17 FY18 FY19E FY2E Net sales 38,682 39,819 41,88 44,28 47,58 % Growth (2.9) COGS 14,766 14,768 14,91 15,583 16,536 Staff costs 2,624 2,885 3,59 3,187 3,376 Advertising costs 4,476 5,117 5,268 5,57 5,989 Other expenses 7,435 7,64 7,528 7,784 8,176 Total expenses 29,3 3,374 3,756 32,125 34,77 EBITDA 9,382 9,444 11,124 12,156 12,981 % growth EBITDA margin Other income Interest costs Depreciation 1,114 1,332 1,565 1,783 1,86 Profit before tax (before exceptional items) 8,667 8,515 9,948 1,829 11,649 Exceptional items (313) Tax 2,534 2,74 3,97 3,454 3,495 PAT (before exceptional items) 6,133 5,775 6,851 7,375 8,154 PAT 5,82 5,775 6,851 7,375 8,154 PAT margin % Growth 4.1 (.8) Exhibit 12: Balance sheet Y/E March (Rsmn) FY16 FY17 FY18 FY19E FY2E Share capital Reserves 1,38 12,466 14,974 14,515 16,917 Net worth 1,31 12,738 15,246 14,787 17,189 Total debt Deferred tax liability Total liabilities 1,63 13,281 15,811 15,352 17,754 Gross block 11,184 13,517 15,46 16,96 18,46 Depreciation 1,13 2,435 4,1 5,784 7,643 Net block 1,81 11,81 11,459 11,176 1,817 Capital work-in-progress Investments Inventories 2,915 2,926 2,267 2,856 2,58 Debtors 1,15 1,299 2,1 1,387 1,78 Cash 2,887 2,943 4,562 5,866 9,443 Loans & advances Other current assets Total current assets 7,751 8,556 1,67 11,877 15,499 Creditors 5,519 5,975 6,145 5,766 6,118 Other current liabilities & provisions 3,422 3,339 3,8 3,1 3,294 Total current liabilities 9,426 9,826 9,828 9,663 1,354 Net current assets (1,676) (1,269) 779 2,214 5,146 Total assets 1,63 13,281 15,811 15,352 17,754 Exhibit 11: Cash flow Y/E March (Rsmn) FY16 FY17 FY18 FY19E FY2E PAT 5,82 5,775 6,851 7,375 8,154 Depreciation 1,114 1,332 1,565 1,783 1,86 Other income (4) (43) -389 (456) (528) (Inc.)/dec. in working capital (532) (35) (43) (131) 646 Cash flow from operations 6,2 6,355 7,597 8,571 1,132 Capital expenditure (-) (2,752) (3,214) (1,863) (614) (1,5) Net cash after capex 3,251 3,14 5,734 7,957 8,632 Dividends paid (-) (3,885) (3,274) (3,264) (7,834) (5,752) Inc./(dec.) in total borrowings Inc./(dec.) in investments Cash from financial activities (3,714) (3,23) (3,242) (7,834) (5,752) Others Opening cash balance 2,547 2,887 2,943 4,562 5,866 Closing cash balance 2,887 2,943 4,562 5,866 9,443 Change in cash balance (234) 13 2,697 1,34 3,577 Exhibit 13: Key ratios Y/E March FY16 FY17 FY18 FY19E FY2E Per share (Rs) EPS Book value DPS Valuation (x) P/Sales EV/sales EV/EBITDA P/E P/BV Return ratios RoCE RoE Profitability ratios Gross margin EBITDA margin EBIT margin PAT margin Liquidity ratios Current ratio Quick ratio Solvency ratio Debt to Equity ratio Turnover ratios Total asset turnover ratio (x) Fixed asset turnover ratio (x) Debtor days Inventory days Creditor days Colgate-Palmolive (India)
5 Apr-17 May-17 Jun-17 Jul-17 Aug-17 Sep-17 Oct-17 Nov-17 Dec-17 Jan-18 Feb-18 Mar-18 Apr-18 May-18 Jun-18 Jul-18 Rating track Date Rating Market price (Rs) Target price (Rs) 29 September 217 Accumulate 1,55 1,1 17 October 217 Accumulate 1,63 1,1 6 February 218 Accumulate 1,121 1,2 22 May 218 Accumulate 1,28 1,26 27 July 218 Accumulate 1,85 1,2 Rating chart Not Covered Covered 5 Colgate-Palmolive (India)
6 Disclaimer Stock Ratings Absolute Returns BUY > 15% ACCUMULATE -5% to15% SELL < -5% DISCLOSURES This Report is published by Nirmal Bang Equities Private Limited (hereinafter referred to as NBEPL ) for private circulation. NBEPL is a registered Research Analyst under SEBI (Research Analyst) Regulations, 214 having Registration no. INH1436. NBEPL is also a registered Stock Broker with National Stock Exchange of India Limited and BSE Limited in cash and derivatives segments. NBEPL has other business divisions with independent research teams separated by Chinese walls, and therefore may, at times, have different or contrary views on stocks and markets. NBEPL or its associates have not been debarred / suspended by SEBI or any other regulatory authority for accessing / dealing in securities Market. NBEPL, its associates or analyst or his relatives do not hold any financial interest in the subject company. NBEPL or its associates or Analyst do not have any conflict or material conflict of interest at the time of publication of the research report with the subject company. NBEPL or its associates or Analyst or his relatives do not hold beneficial ownership of 1% or more in the subject company at the end of the month immediately preceding the date of publication of this research report. NBEPL or its associates / analyst has not received any compensation / managed or co-managed public offering of securities of the company covered by Analyst during the past twelve months. NBEPL or its associates have not received any compensation or other benefits from the company covered by Analyst or third party in connection with the research report. Analyst has not served as an officer, director or employee of Subject Company and NBEPL / analyst has not been engaged in market making activity of the subject company. Analyst Certification: We, Vijay Chugh, the Independent Research Analyst and Abhishek Navalgund, Research Associate are the authors of this report, hereby certify that the views expressed in this research report accurately reflects our personal views about the subject securities, issuers, products, sectors or industries. It is also certified that no part of the compensation of the analyst(s) was, is, or will be directly or indirectly related to the inclusion of specific recommendations or views in this research. The analyst(s) principally responsible for the preparation of this research report and has taken reasonable care to achieve and maintain independence and objectivity in making any recommendations. 6 Colgate-Palmolive (India)
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Team Details: Name Id Direct Line Rahul Arora CEO rahul.arora@nirmalbang.com - Girish Pai Head of Research girish.pai@nirmalbang.com / 18 Dealing Ravi Jagtiani Dealing Desk ravi.jagtiani@nirmalbang.com , Pradeep Kasat Dealing Desk pradeep.kasat@nirmalbang.com /811, Michael Pillai Dealing Desk michael.pillai@nirmalbang.com /813, Nirmal Bang Equities Pvt. Ltd. Correspondence Address B-2, 31/32, Marathon Innova, Nr. Peninsula Corporate Park, Lower Parel (W), Mumbai-413. Board No. : /1; Fax. : Colgate-Palmolive (India)
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