Colgate-Palmolive. Institutional Equities. Management Meet Update. Structural Story Strong As Ever BUY

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1 Management Meet Update Institutional Equities Colgate-Palmolive (India) Reuters: COLG.BO; Bloomberg: CLGT IN Structural Story Strong As Ever We had a meeting with the management of Colgate-Palmolive (India) or CPIL to discuss business prospects. The company s market share, which stood at 57.8% in 4QFY15, was the highest in several decades and we expect its volume and sales growth to revive in the medium term because of rural expansion (number of villages covered more than doubled from 22,000 in CY12 to 54,000 in CY14) and sustained sharp growth in premium segment (currently at ~20% of sales, much lower compared to other emerging markets like Brazil), with the latter continuing to substantially aid gross margin as well. In 4QFY15, gross margin was up 312bps YoY, leading to a 12-quarter high EBITDA margin. Despite excise duty benefit coming off in FY16 (part of the impact will be offset by lower commodity prices and sustained product price hikes of 6%-7%), we expect EBITDA margin to increase 300bps in the next two years led by premiumisation, savings on logistics costs lower advertising and promotion (A&P) expenses to sales and revival in sales growth. We have not made any changes to our estimates and expect EPS growth of 18%/23%in FY16/FY17, respectively. Our investment thesis based on resilient volume, superiority over peers, expansion in gross margin and lower A&P expenses to sales has been and is likely to continue to play out well in future for CPIL, which we believe is the best consumer goods company in India. We remain bullish on CPIL s structural story and with its stock price declining 5% since our last update; we have upgraded our rating on it to Buy (from Accumulate earlier). CPIL stock, which deserves a premium, trades at 32.7xFY17E EPS, which is at a discount to MNC peers despite a 20.5% EPS CAGR, superior return ratios (over 80%) compared to peers and dividend yield of 1.8%/2.2% in FY16E/FY17E, respectively. We have retained our target multiple of 38x and a target price of Rs2,277 on CPIL, up 16% from the current market price. Key management meet highlights: Industry reported a 2% decline in volume for the January-April 2015 period. CPIL hopes that a decent monsoon this year and government initiatives will revitalise industry growth. CPIL did much better, increasing its volume by 5% during this period and raising market share further to 57.8%. Revival in India s GDP growth will be a key factor driving growth in urban areas. Historically toothpaste volume usually goes up after a lag to GDP growth, just as the relative slowdown was also witnessed later compared to other FMCG categories. CPIL has prepared a scenario analysis of all possible actions by rival P&G, which appears to be back on the drawing board as far as its toothpaste strategy is concerned. While a price reduction by P&G may be a possibility, it appears unlikely given P&G s struggle globally, its acknowledgement of committing a similar mistake in the detergents category in India, renewed focus on triple bottom-line and its travails in India on an overall basis. As was the case in December 2014 quarter, CPIL is outpacing peers in the gel toothpaste segment in states having a large gel toothpaste market and is now the market leader in this segment in many states including Maharashtra - the largest gel toothpaste market by size. Colgate Active Salt toothpaste is also doing extremely well and now accounts for 4%-5% of sales. CPIL does not see any material increase in raw material prices, at least in June 2015 and September 2015 quarters. The 6%-7% annual product price hike (including premiumisation impact) will continue. Despite the likely impact on margins because of excise duty benefit expiring at its Baddi plant (accounting for 40% of production compared to over 60% earlier) if raw material costs continue to be low, then lower EBITDA margins are unlikely as we believe there will be margin benefit from premiumisation, lower A&P spending to sales ratio and savings in logistics costs because of the new Sanand facility. 23 June 2015 BUY Sector: FMCG CMP: Rs1,963 Target Price: Rs2,277 Upside: 16% Krishnan Sambamoorthy krishnan.s@nirmalbang.com Aditya Joshi aditya.joshi@nirmalbang.com Key Data Current Shares O/S (mn) Mkt Cap (Rsbn/US$bn) 267/ Wk H / L (Rs) 2,199/1,441 Daily Vol. (3M NSE Avg.) 166,025 One Year Indexed Stock Performance Jun-14 Aug-14 Oct-14 Dec-14 Feb-15 Apr-15 Jun-15 Colgate-Palmolive Price Performance (%) 1 M 6 M 1 Yr Colgate-Palmolive (I) (1.9) Nifty Index (1.3) Source: Bloomberg NSE CNX NIFTY INDEX Please refer to the disclaimer towards the end of the document.

2 Exhibit 1: Financial summary Y/E March (Rsmn) FY13 FY14* FY15 FY16E FY17E Revenue 31,654 35,788 39,818 44,994 51,743 YoY (%) EBITDA 6,584 6,640 8,222 9,944 12,263 EBITDA (%) Adj. PAT 4,968 4,858 5,603 6,625 8,152 YoY (%) 11.3 (2.2) FDEPS (Rs) RoE (%) RoCE (%) Dividend yield (%) P/E (x) *Net sales in FY14 were up ~15% YoY, but revenue growth was down because of lower operating income after the sale of IT outsourcing business to the parent Volume growth and outlook Industry reported a 2% decline in volume for the January-April 2015 period. CPIL hopes that a decent monsoon this year and government initiatives will revitalise industry growth. The company did much better, increasing its volume by 5% during this period and raising its market share further to 57.8%. For the industry, rural volume was flat for the above period, while urban volume declined YoY. Extended use of toothpaste for a longer period is a key factor behind the volume decline in urban areas. However, there has been no down-trading in urban areas. Premium segment, accounting for around 20% of toothpaste sales, is in fact growing much faster compared to overall sales. Sensitivity toothpaste segment (12% of total sales) grew 15% YoY and Whitening segment (3%-4% of sales) grew 17%-18% YoY in the January-April 2015 period. The largest segment - Family (Colgate dental cream) and freshness (Colgate gel toothpaste) also grew 4%-5% during this period, but the lower end segment (which has Colgate Cibaca and Dabur s Babool) declined. Mouthwash segment was flat after declining in earlier quarters. Products in this segment are viewed as purely discretionary and have been affected by the slowdown in urban areas. Revival in India s GDP growth will be a key factor driving growth in urban areas. Historically, toothpaste volume usually goes up after a lag to GDP growth, just as the slowdown was also witnessed later compared to other FMCG categories. Competition According to CPIL, P&G s strategy in the toothpaste segment has been surprising, given the regional nature of initial launch and the national launch planned later, which never materialised as expected. This means that its toothpaste market share, even nearly two years post Oral-B toothpaste launch, is less than 1%. CPIL also believes that there were supply chain problems faced by P&G, which along with slow off-take meant that stocks on shelves were sometimes 10-month old. CPIL has prepared a scenario analysis of all possible actions by rival P&G, which appears to be back on the drawing board as far as its toothpaste strategy is concerned. While a price reduction by P&G may be a possibility, it appears unlikely given the company s struggle globally, its acknowledgement of committing a similar mistake in the detergent category in India, renewed global focus on triple bottomline and its travails in India on an overall basis. Distribution is also a key challenge for P&G in the toothpaste category. In the long run, even if P&G gains considerable market share in toothpaste in India, it is likely to be at the cost of other players - as it panned out in case of the toothbrush segment in India where CPIL gained share, despite the advent of Oral B, while the others shed market share. Product discounts by Hindustan Unilever in modern trade has reduced in the ongoing quarter and CPIL believes that it is not a sustainable strategy. 2 Colgate-Palmolive (India)

3 As was the case in the December 2014 quarter, CPIL is outpacing peers in the gel toothpaste segment in states having a large gel toothpaste market and is now the market leader in this segment in many states including Maharashtra - the largest gel toothpaste market by size. Colgate Active Salt toothpaste is also doing extremely well and now accounts for 4%-5% of sales. Patanjali is a small, but a fast growing player which is turning aggressive in modern trade as well. Food product and shampoo off-take is apparently better than toothpaste, which is also doing well for this company. In order to close the gap with Sensodyne in the sensitive teeth segment, CPIL is planning to use its strong linkage with the dentist community, have a separate team of medical representatives and use the platform of best technology for sensitive teeth in the world backed by tests. There is a rising trend of dentists prescribing Colgate Sensitive Pro Relief toothpaste to their patients. Growth opportunity Market penetration data in India means usage of a product even once in six months and is therefore highly misleading. The right metric will be to look at per capita consumption in which India trails behind when compared to other emerging markets. Even if per capita consumption per gram and value per gram touch China s current levels in the next 10 years, it means quadrupling of the market. Both volume growth and premiumisation are very much on the right path in India, barring the recent blip. CPIL had reported double-digit or close to double-digit volume growth YoY for close to 20 quarters before the blip and premiumisation continues strongly even in the midst of the current slowdown. The company was able to report 11%-12% sales growth even during a slowdown and should be able to post ~15% CAGR on a steady-state basis. Conversion of 250mn customers in India not using any form of toothpaste - as mentioned in the last company presentation - is dependent on the government s strategy and the company s efforts to grow the category in schools and villages, which is unparalleled in the FMCG sector (over 30,000 dentists used to reach over 125 mn school children cumulatively). Profitability is lower in toothbrush segment because of lower brand loyalty and higher trade margin. CPIL is trying to improve this by launching various brands of toothbrushes like Colgate Zig Zag and Colgate Charcoal in the premium segment. Premium segment in toothbrush is growing fast, but accounts for less than 3%-4% of toothbrush sales compared to ~20% in case of toothpaste sales. Toothbrush segment accounts for around 15% of the market and is also growing at a decent pace despite the slowdown. Rise in barriers to entry Uttar Pradesh and Bihar are doing better on a low base compared to others and CPIL is doing better than peers partly as a result its lower-end brand (Colgate Cibaca, HUL does not have a brand in this segment) and also the company s category development efforts. Rural reach of CPIL increased substantially compared to two years ago. The number of villages covered increased from 22,000 to 54,000 between CY12 and CY14. Distributors sales representatives in these regions increased from 353 to 1,372 over the same period. Overall reach is close to 4.8mn outlets and is expected to grow. However, CPIL will be wary of incremental costs of a further increase in distribution reach versus potential reward. Colgate toothpaste is already the second-best FMCG brand in terms of reach in India after HUL s Lifebuoy soap. CPIL s management did not disclose its direct distribution reach out of 4.8mn outlets that were covered. The use of technology is also on the rise. As much as 60%-70% of salesmen, even of third-party distributors, in top cities now operate a handheld device which enables faster and more efficient information gathering on stock at all levels - right up to the retailer level. 3 Colgate-Palmolive (India)

4 Nov-09 Feb-10 May-10 Aug-10 Nov-10 Feb-11 May-11 Aug-11 Oct-11 Jan-12 Apr-12 Jul-12 Oct-12 Jan-13 Apr-13 Jul-13 Oct-13 Dec-13 Mar-14 Jun-14 Sep-14 Dec-14 Mar-15 Jun-15 Institutional Equities Raw material cost outlook and product price hike CPIL does not see any material increase in raw material costs, at least in June 2015 and September 2015 quarters. The 6%-7% annual product price hike (including premiumisation impact) is expected to continue. Despite the likely impact on margins because of excise duty benefit expiring at Baddi unit (now accounting for 40% of production compared to over 60% earlier), if raw material costs continue to be low, then lower EBITDA margins may not materialise as we believe there will be margin benefit from premiumisation, lower A&P spending to sales ratio and savings in logistics costs because of the new Sanand facility which is much closer to suppliers and key markets than the Baddi plant. Sanand plant is in its early stage (little over a year since commissioning in March 2014) and therefore its capacity utilisation level is low. The plant is state-of-the-art and therefore there will be efficiency benefit as well eventually. Extraordinary item likely in 1QFY16 There is a VRS scheme underway at the Waluj plant and will feature in the June 2015 quarter as part of extraordinary items. The size of VRS has not been disclosed. CPIL will look at disposing off the land at the plant eventually at the right time. We believe that as per prevailing rates, CPIL can obtain Rs1.8bn to Rs2.1bn from the sale of 35 acres of land, but we are not factoring it in our estimates. Non-oral care business Non-oral care business expansion is not a focus area for CPIL in the near term as the company sees a tremendous advantage in utilising its huge cash flow in fast growing and premiumisation category - toothpaste - an advantage that its oral care peers do not have. Exhibit 2: Valuation with FMCG peers EPS (Rs) P/E (x) Companies CMP (Rs) FY15 FY16E FY17E FY15 FY16E FY17E CPIL* 1, GSK Consumer* 6, Nestle India* 6, P&G Hygiene* 6, UB* GCPL 1, Marico Emami 1, Dabur Britannia* 2, ITC Hindustan Unilever Jubilant FoodWorks* 1, Source: Bloomberg, Nirmal Bang Institutional Equities Research * Our forecasts, the rest are as per Bloomberg consensus Exhibit 3: One-year forward P/E (x) Source: Company, Bloomberg, Nirmal Bang Institutional Equities Research 4 Colgate-Palmolive (India)

5 Financials Exhibit 4: Income statement Y/E March (Rsmn) FY13 FY14 FY15 FY16E FY17E Net sales 31,654 35,788 39,818 44,994 51,743 % growth Raw material costs 12,502 14,020 14,678 16,586 18,908 Staff costs 2,494 2,118 2,589 2,745 3,019 Advertisement costs 4,901 6,887 7,143 7,786 8,642 Other expenses 5,173 6,123 7,186 7,934 8,911 Total expenditure 25,070 29,148 31,596 35,050 39,480 EBITDA 6,584 6,640 8,222 9,944 12,263 % growth EBITDA margin (%) Other income Interest costs (399) (358) (316) (419) (532) Depreciation Profit before tax 6,630 6,636 7,823 9,601 11,988 % growth Tax 1,663 1,778 2,219 2,976 3,836 Effective tax rate (%) Net profit 4,968 4,858 5,603 6,625 8,152 % growth 11.3 (2.2) Adjusted net profit 4,968 4,858 5,603 6,625 8,152 % growth 11.3 (2.2) Extra-ordinary items Reported net profit 4,968 5,399 5,603 6,625 8,152 % growth * Net sales in FY14 were up by ~15% YoY, but revenue growth was down because of lower operating income after the sale of IT outsourcing business to the parent. Exhibit 6: Balance sheet Y/E March (Rsmn) FY13 FY14 FY15 FY16E FY17E Equity Reserves 4,760 5,863 7,671 8,763 10,106 Net worth 4,896 5,999 7,807 8,899 10,242 Liabilities 4,896 5,999 7,807 8,899 10,242 Gross block 6,735 9,927 12,742 13,642 14,442 Depreciation 3,929 4,368 5,119 5,925 6,780 Net block 2,807 5,559 7,623 7,717 7,662 Capital work-in-progress 1,020 1, Inventories 1,853 2,257 2,521 2,903 3,334 Debtors Cash 4,791 2,946 4,002 6,091 7,336 Liquid Investments Other current assets 1,314 1,692 1,451 1,538 1,631 Total current assets 9,242 7,913 9,141 11,787 13,690 Creditors 4,666 5,100 5,329 6,751 7,141 Other current liabilities 3,506 3,789 3,928 4,053 4,169 Total current liabilities 8,172 8,889 9,258 10,805 11,311 Net current assets 1,070 (975) (116) 982 2,379 Total assets 4,896 5,999 7,807 8,899 10,242 Exhibit 5: Cash flow Y/E March (Rsmn) FY13 FY14 FY15 FY16E FY17E EBIT 6,147 6,133 7,471 9,138 11,409 (Inc.)/dec. in working capital 1, (153) Cash flow from operations 7,168 6,332 7,667 10,129 11,255 Other income Depreciation Interest paid (-) Tax paid (-) (1,663) (1,778) (2,219) (2,976) (3,836) Dividends paid (-) (4,417) (4,260) (3,796) (5,532) (6,809) Extra-ordinary items Net cash from operations 2,009 1,846 2,755 2,890 2,045 Capital expenditure (-) (1,025) (3,656) (1,700) (800) (800) Net cash after capex 983 (1,809) 1,055 2,090 1,245 Cash from financial activities Others (8) (36) 1 (1) - Opening cash balance 3,816 4,791 2,946 4,002 6,091 Closing cash balance 4,791 2,946 4,002 6,091 7,336 Change in cash balance 975 (1,845) 1,056 2,089 1,245 Exhibit 7: Key ratios Y/E March FY13 FY14 FY15 FY16E FY17E Per share (Rs) EPS DPS Book value Valuation (x) P/E P/BV EV/EBITDA EV/sales Return ratios (%) RoCE RoE Margins (%) Gross margin EBITDA margin PBT margin PAT margin Turnover ratios Fixed asset turnover ratio (x) Avg. inventory period (days) Avg. collection period (days) Avg. payment period (days) Solvency ratios (x) Debt (Cash)-equity (1.1) (0.6) (0.6) (0.7) (0.8) Interest coverage (0.1) (0.1) (0.0) (0.0) (0.0) Dividend yield (%) Growth (%) Sales EBITDA PAT 11.3 (2.2) Colgate-Palmolive (India)

6 Rating track Date Rating Market price (Rs) Target price (Rs) 7March 2014 Buy 1,324 1,691 26May 2014 Buy 1,369 1,660 2 July 2014 Accumulate 1,515 1, July 2014 Accumulate 1,637 1,813 7 November 2014 Buy 1,714 2, December 2014 Buy 1,778 2, Jan 2015 Buy 1,913 2,210 4 March 2015 Buy 2,008 2, May 2015 Accumulate 2,074 2, June 2015 Buy 1,963 2,277 6 Colgate-Palmolive (India)

7 Disclaimer Stock Ratings Absolute Returns BUY > 15% ACCUMULATE -5% to15% SELL < -5% This report is published by Nirmal Bang s Institutional Equities Research desk. Nirmal Bang has other business units with independent research teams separated by Chinese walls, and therefore may, at times, have different or contrary views on stocks and markets. This report is for the personal information of the authorised recipient and is not for public distribution. This should not be reproduced or redistributed to any other person or in any form. This report is for the general information for the clients of Nirmal Bang Equities Pvt. Ltd., a division of Nirmal Bang, and should not be construed as an offer or solicitation of an offer to buy/sell any securities. We have exercised due diligence in checking the correctness and authenticity of the information contained herein, so far as it relates to current and historical information, but do not guarantee its accuracy or completeness. The opinions expressed are our current opinions as of the date appearing in the material and may be subject to change from time to time without notice. Nirmal Bang or any persons connected with it do not accept any liability arising from the use of this document or the information contained therein. The recipients of this material should rely on their own judgment and take their own professional advice before acting on this information. Nirmal Bang or any of its connected persons including its directors or subsidiaries or associates or employees or agents shall not be in any way responsible for any loss or damage that may arise to any person/s from any inadvertent error in the information contained, views and opinions expressed in this publication. Nirmal Bang Equities Private Limited (hereinafter referred to as NBEPL ) is a registered Member of National Stock Exchange of India Limited, Bombay Stock Exchange Limited. NBEPL is in the process of making an application with SEBI for registering as a Research Entity in terms of SEBI (Research Analyst) Regulations, NBEPL or its associates including its relatives/analyst do not hold any financial interest/beneficial ownership of more than 1% in the company covered by Analyst. NBEPL or its associates/analyst has not received any compensation from the company covered by Analyst during the past twelve months. NBEPL /analyst has not served as an officer, director or employee of company covered by Analyst and has not been engaged in market-making activity of the company covered by Analyst. The views expressed are based solely on information available publicly and believed to be true. Investors are advised to independently evaluate the market conditions/risks involved before making any investment decision. Access all our reports on Bloomberg, Thomson Reuters and Factset. 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 /8101, Michael Pillai Dealing Desk michael.pillai@nirmalbang.com /8103, Umesh Bharadia Dealing Desk umesh.bharadia@nirmalbang.com Nirmal Bang Equities Pvt. Ltd. Correspondence Address B-2, 301/302, Marathon Innova, Nr. Peninsula Corporate Park, Lower Parel (W), Mumbai Board No. : /1; Fax. : Colgate-Palmolive (India)