Colgate Palmolive SELL. PhillipCapital (India) Pvt. Ltd. FMCG : Quarterly Result Update 29 May 2013

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1 Colgate Palmolive PhillipCapital (India) Pvt. Ltd. FMCG : Quarterly Result Update 29 May 2013 Colgate reported disappointing set of numbers for as the company reported earnings de growth for a second consecutive quarter but the company surprised positively on volume growth. We also note that the cost structure has moved up significantly higher than our expectations and we revise our FY14E earnings downwards. We maintain our Sell recommendation on the stock. The key takeaways of the results and conference call are as follows: Volume growth at 12% YoY surprises positively as revenues growth by 18% YoY: total revenue growth of 18% YoY was driven by 12% volume and 6% YoY price growth which included a product mix improvement of 2 3% YoY and 3 4% YoY of price hikes. The Company surprised positively on consolidated volume against our expectation of 10% YoY with toothpaste volume growth at 11% YoY. The management indicated that mouthwash category grew by only 8% YoY in FY13 as the category slowed down considerably from mid 30s (%) in the preceding years. Step up in brand investments translating to persistent market share gains: Colgate registered market share gains across categories. Colgate reported 140 bps YoY market share gains in Toothpaste, furthering leadership to 55.4%. In Toothbrush category, market share has recovered to 41.5% (Colgate has completely regained market share lost to P&G), increase of 380 bps YoY. Gross Margins expand marginally: Gross margin expanded by 40bps YoY. The management indicated that the company will take price hikes in line with input cost inflation. The company has not initiated any pricing actions recently. We have modeled for 80 bps YoY improvement in gross margins in FY14E on account of benign input cost inflation and product mix improvement. EBITDA de grows as cost structure moves up sharply: EBIDTA de grew by 3% YoY and was below our estimates by 17%. Advertising expenses increased by 41% YoY to 10.1% of sales (promotional expenses are included in other operating expenses) up 160bps YoY. The increase in advertising expenses is on account of rising competitive intensity. We believe that with the impending launch of P&G s Oral B toothpaste competitive activity will continue to remain intense and advertising expenses are likely to remain heightened. Employee expenses increased by 34% YoY and other operating expenses increased by 28% YoY. The management indicated that employee expenses were higher due to a certain one off but the sharp increase in other operating expenses was on account of increase in freight and power which are unlikely to decline in the medium term. Adjusting for slump sale of GSSO division, Colgate s EBITDA margin profile is expected to improve considerably in FY14, however there is no material impact on the bottomline. PAT degrowth of 6% YoY: The company disappointed on earnings for a second successive quarter. The miss was primarily on account of sluggish EBIDTA growth. PAT was impacted by increase in tax rate of 300bps YoY, which is expected to move up by 150 bps YoY over the next few years. Downward revision of estimates, maintain SELL recommendation: We revise our FY14E and FY15E earnings downwards as we incorporate the elevated cost structure. We value the company at 30 (earlier at 29x) FY14E earnings at Rs Considering the significant downside from the current levels we maintain our Sell recommendation on the stock. SELL CLGT IN CMP RS 1477 TARGET RS 1250 ( 15%) Company Data O/S SHARES (MN) : 136 MARKET CAP (RSBN) : 201 MARKET CAP (USDBN) : 4 52 WK HI/LO (RS) : 1580 / 1098 LIQUIDITY 3M (USDMN) : 2.9 FACE VALUE (RS) : 1 Share Holding Pattern, % PROMOTERS : 51.0 FII / NRI : 21.9 FI / MF : 5.2 NON PROMOTER CORP. HOLDINGS : 1.2 PUBLIC & OTHERS : 20.7 Price Performance, % 1mth 3mth 1yr ABS REL TO BSE Price Vs. Sensex (Rebased values) Apr 10 Feb 11 Dec 11 Oct 12 Colgate Pal BSE Sensex Source: PhillipCapital India Research Other Key Ratios Rs mn FY13 FY14E FY15E Net Sales 30,847 35,286 40,778 EBITDA 6,570 7,624 8,945 Net Profit 4,971 5,537 6,409 EPS, Rs PER, X EV/EBIDTA, x EV/Net Sales, x ROE, % Source: PhillipCapital India Research Est. Naveen Kulkarni, CFA, FRM ( ) nkulkarni@phillipcapital.in Ennette Fernandes ( ) efernandes@phillipcapital.in

2 Results (Rs mn) QoQ, % YoY, % Net sales 8,116 7, , Growth, % Total income 8,116 7, , Operating expenses 6,627 6, , EBITDA Growth, % Margin, % Depreciation EBIT 1,376 1, , Margin, % Interest paid 2 Other Income Pre tax profit 1,696 1, , Tax provided Net Profit 1,233 1, , Reported PAT 1,233 1, , Growth, % Margin, % Adj Fully Dilluted EPS, Rs Source: Company, PhillipCapital India Research Change in Estimates (Rs mn) Earlier estimates Revised estimates Upgrade/(downgrade) (%) FY14E FY15E FY14E FY15E FY14E FY15E Net Sales 34,673 40,071 35,286 40, % 1.8% EBITDA 7,890 9,248 7,624 8, % 3.3% EBITDA margin (%) (115) (114) PBT 7,899 9,241 7,545 8, % 4.0% Adj PAT 5,786 6,723 5,537 6, % 4.7% Adj PAT margin (%) (100) (106) Adj EPS (Rs) % 4.6% Source: PhillipCapital India Research Estimates 2 of 7

3 Underlying Volume growth YoY (%) Price growth YoY (%) Toothpaste Market Share (%) Toothbrush Market Share (%) Gross Margins (%) Source: Company, PhillipCapital India Research 3 of 7

4 Financials Income Statement Y/E Mar, Rs mn FY12 FY13 FY14E FY15E Net sales 26,239 30,847 35,286 40,778 Growth, % Other income Total income 26,932 31,642 35,392 40,895 Raw material expenses 10,502 12,504 14,015 16,178 Employee expenses 2,156 2,495 2,275 2,620 Other Operating expenses 8,489 10,073 11,477 13,153 EBITDA (Core) 5,785 6,570 7,624 8,945 Growth, % Margin, % Depreciation EBIT 5,392 6,135 7,092 8,352 Growth, % Margin, % Interest paid Other Non Operating Income Pre tax profit 5,883 6,634 8,276 8,871 Tax provided 1,419 1,663 2,260 2,462 Profit after tax 4,464 4,971 6,016 6,409 Net Profit 4,464 4,971 6,016 6,409 Growth, % Net Profit (adjusted) 4,464 4,971 5,537 6,409 Unadj. shares (m) Wtd avg shares (m) Balance Sheet Y/E Mar, Rs mn FY12 FY13 FY14E FY15E Cash & bank 3,098 4,288 3,605 4,105 Debtors ,111 Inventory 2,177 1,852 2,372 2,636 Loans & advances 1,318 1,589 1,817 2,100 Total current assets 7,466 8,542 8,747 9,952 Investments Gross fixed assets 6,132 7,082 8,582 9,482 Less: Depreciation 3,587 4,023 4,555 5,148 Add: Capital WIP Net fixed assets 3,238 3,824 4,670 4,666 Total assets 11,296 13,061 14,112 15,580 Current liabilities 6,942 8,171 8,654 9,382 Total current liabilities 6,942 8,171 8,654 9,382 Total liabilities 6,942 8,338 8,700 9,382 Paid up capital Reserves & surplus 4,218 4,587 5,276 6,061 Shareholders equity 4,354 4,723 5,412 6,197 Total equity & liabilities 11,295 13,061 14,112 15,579 Source: Company, PhillipCapital India Research Estimates Cash Flow Y/E Mar, Rs mn FY12 FY13 FY14E FY15E Pre tax profit 5,883 6,634 8,276 8,871 Depreciation Chg in working capital 725 1, Total tax paid 1,372 1,767 2,260 2,462 Cash flow from operating activities 4,180 6,812 6,023 6,712 Capital expenditure 999 1,021 1, Chg in investments Cash flow from investing activities 1,082 1,021 1, Free cash flow 3,097 5,791 4,644 6,124 Equity raised/(repaid) Debt raised/(repaid) Dividend (incl. tax) 3,952 4,455 5,261 5,624 Cash flow from financing activities 4,586 5,155 5,881 6,432 Net chg in cash 1, , Valuation Ratios & Per Share Data FY12 FY13 FY14E FY15E Per Share data EPS (INR) Growth, % Book NAV/share (INR) FDEPS (INR) CEPS (INR) CFPS (INR) DPS (INR) Return ratios Return on assets (%) Return on equity (%) Return on capital employed (%) Turnover ratios Asset turnover (x) (41.4) (50.4) (53.3) (54.4) Sales/Total assets (x) Sales/Net FA (x) Working capital/sales (x) (0.1) (0.1) (0.1) (0.1) Fixed capital/sales (x) Working capital days (35.8) (46.3) (36.3) (31.6) Liquidity ratios Current ratio (x) Quick ratio (x) Interest cover (x) , , ,995.4 Dividend cover (x) Net debt/equity (%) (71.2) (90.8) (66.6) (66.2) Valuation PER (x) Price/Book (x) Yield (%) EV/Net sales (x) EV/EBITDA (x) EV/EBIT (x) of 7

5 Recommendation Chart Sell (TP 1060) Neutral (TP 1215) Sell (TP 1170) Sell (TP 1250) Neutral (TP 1010) 500 Jan 11 Apr 11 Jul 11 Oct 11 Jan 12 Apr 12 Jul 12 Oct 12 Jan 13 Apr 13 Source: PhillipCapital India Research 5 of 7

6 Management Vineet Bhatnagar (Managing Director) (91 22) Sajid Khalid (Head Institutional Equities) (91 22) Jignesh Shah (Head Equity Derivatives) (91 22) Research Automobiles, IT Services Deepak Jain (9122) Neha Garg (9122) Varun Vijayan (9122) Banking, NBFCs Manish Agarwalla (9122) Sachit Motwani, FRM (9122) Consumer, Media, Telecom Naveen Kulkarni, CFA, FRM (9122) Ennette Fernandes (9122) Vivekanand Subbaraman (9122) Cement Vaibhav Agarwal (9122) Sales & Distribution Kinshuk Tiwari (9122) Pawan Kakumanu (9122) Shubhangi Agrawal (9122) Dipesh Sohani (9122) Economics Anjali Verma (9122) Engineering, Capital Goods Ankur Sharma (9122) Jishar Thoombath (9122) Metals Dhawal Doshi (9122) Dharmesh Shah (9122) Infrastructure Vibhor Singhal (9122) Raheel Arathodi (9122) Oil&Gas, Fertiliser Gauri Anand (9122) Saurabh Rathi (9122) Sunil Kamath (Sales Trader) (9122) Rajesh Ashar (Sales Trader) (9122) Retail, Real Estate Abhishek Ranganathan, CFA (9122) Neha Garg (9122) Mid caps Kapil Bagaria (9122) Raheel Arathodi (9122) Technicals & Quant Neppolian Pillai (9122) Shikha Khurana (9122) Sr. Manager Equities Support Rosie Ferns (9122) Mayur Shah (Execution) (9122) Gurudatt Uchil (Execution) (9122) Contact Information (Regional Member Companies) SINGAPORE Phillip Securities Pte Ltd 250 North Bridge Road, #06 00 Raffles City Tower, Singapore Tel : (65) Fax: (65) JAPAN Phillip Securities Japan, Ltd 4 2 Nihonbashi Kabutocho, Chuo ku Tokyo Tel: (81) Fax: (81) THAILAND Phillip Securities (Thailand) Public Co. Ltd. 15th Floor, Vorawat Building, 849 Silom Road, Silom, Bangrak, Bangkok Thailand Tel (66) Fax: (66) UNITED STATES Phillip Futures Inc. 141 W Jackson Blvd Ste 3050 The Chicago Board of Trade Building Chicago, IL USA Tel (1) Fax: (1) MALAYSIA Phillip Capital Management Sdn Bhd B 3 6 Block B Level 3, Megan Avenue II, No. 12, Jalan Yap Kwan Seng, Kuala Lumpur Tel (60) Fax (60) INDONESIA PT Phillip Securities Indonesia ANZ Tower Level 23B, Jl Jend Sudirman Kav 33A, Jakarta 10220, Indonesia Tel (62) Fax: (62) FRANCE King & Shaxson Capital Ltd. 3rd Floor, 35 Rue de la Bienfaisance Paris France Tel (33) Fax : (33) AUSTRALIA PhillipCapital Australia Level 37, 530 Collins Street Melbourne, Victoria 3000, Australia Tel: (61) Fax: (61) INDIA PhillipCapital (India) Private Limited No. 1, C Block, 2 nd Floor, Modern Center, Jacob Circle, K. K. Marg, Mahalaxmi Mumbai Tel: (9122) Fax: (9122) HONG KONG Phillip Securities (HK) Ltd 11/F United Centre 95 Queensway Hong Kong Tel (852) Fax: (852) CHINA Phillip Financial Advisory (Shanghai) Co. Ltd. No 550 Yan An East Road, Ocean Tower Unit 2318 Shanghai Tel (86) Fax: (86) UNITED KINGDOM King & Shaxson Ltd. 6th Floor, Candlewick House, 120 Cannon Street London, EC4N 6AS Tel (44) Fax: (44) SRI LANKA Asha Phillip Securities Limited Level 4, Millennium House, 46/58 Navam Mawatha, Colombo 2, Sri Lanka Tel: (94) Fax: (94) of 7

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