Colgate TEAM ID Recommendation: SELL Market Cap: Rs Cr. 5,166.64

Transcription

1 TEAM ID 1003 Colgate Recommendation: SELL Market Cap: Rs Cr. 5, Price: Rs Month Price Objective: Rs Estimates 2007E 2008E 2009E Net income (Rs. mn) 1, , ,357.7 EPS P/E EPS Growth % EV/EBITDA ROE Investment Argument % 34.0% 10.4% % 66.9% 67.6% The company s expected growth in sales and profits does not support the current share price. Although, the company is expected to increase profits significantly, the stock is still highly overvalued at current levels The company is highly dependant on oral care (95% of sales), thus increasing the risk. Further competition is expected to increase in the future with the rise of private labels. Colgate-Palmolive is the leader in the Rs crore oral care industry, with dominance in all the three major segments viz. toothpaste, toothpowder and toothbrush. H I G H L I G H T S: The company is expected to increase its topline at a pace faster than the industry average. This is due to successful launch of new products and better price realizations. It is expected to grow at 12% (CAGR FY06-10) The bottom line of the company is expected to increase at a faster rate, thanks to the shift of production to an excise and tax free facility. The net profit margins are expected to increase by 261 basis points from FY Using the discounted cash flow model, we arrive at an intrinsic value of Rs per share. This is way below the CMP. Using the Intrinsic P/E methodology, we arrive at a value of Rs , again a significant discount to the CMP Using the reverse DCF method, the market expects the company s topline to grow by 14% p.a. and its FCF to grow by 11% p.a. (assuming terminal FCF growth of 5%). This growth is not sustainable in the current market environment

2 COMPANY BACKGROUND Colgate BSE Sensex BSE FMCG Index /12/ /03/ /05/ /08/ /11/2006 Source: Colgate Palmolive India is a 51 % subsidiary of Colgate Palmolive Company, USA. It is the market leader in the Indian oral care market, with a 51 % market share in the toothpaste segment, 48 % market share in the toothpowder market and 30 % share in the toothbrush market. It is a top player in the oral care segment in India and its most prominent brand, Colgate Dental Cream has become synonymous with the product category. The company also has a presence in the premium toilet soap segment and in shaving products, which are sold under the Palmolive brand. Other well-known consumer brands include Charmis skin cream and Axion dish wash. The company's strategy is to focus on growing volumes by improving penetration through aggressive campaigning and consumer promotions. Margin gains are being targeted through efficient supply chain management and bringing down cost of operations. Colgate has managed to maintain its leadership position in the oral care segment and increase its EPS in spite of growing competition in the past few years.

3 NET PROFIT In Rs. cr Mar 03(12) Mar 04(12) Mar 05(12) Mar 06(12) YEAR Source: EPS in Rs Mar 03(12) Mar 04(12) Mar 05(12) Mar 06(12) Year Source: OWNERSHIP PATTERN The company is promoted by its parent company Colgate Palmolive, USA and 51% of it stock is owned by its parent company. HOLDING DETAILS promoters MF/FIs FIIs Public and Others Source:

4 MANAGEMENT OF THE COMPANY Colgate is a professionally managed company, with Mr. Roger Calmeyer leading the company since Jun Colgate has a team of people who have varied domestic and foreign experience. Mr. Roger Calmeyer VP South Asia and MD, India Moses A Elias Exec VP and CFO K Vaidyanathan VP and Company Secretary Debashish Roy VP Human Resources Vinay Hegde Exec VP Marketing Shekar Bharadwaj VP Sales Arun Pande VP Info Technology Surendra Manek VP R&D Lawrence Wheeler Exec VP Manu. And Supply Chain Source: As one of the world's most widely recognized consumer brands and one of India's best employers, Colgate attracts the country's best talent at various levels. It provides training and development to enhance and develop the skills of its employees and follows a merit based approach to reward talent. Even while closing down its Sewri plant and Nepal subsidiary, it provided VRS to its workers and employees. In Nepal, the political instability and deteriorating political situation is a source of concern to the company and it has taken steps to protect its assets and its people. PRODUCTS ANALYSIS Colgate is present in 2 segments in India: Oral care Personal and home care

5 Revenue Break Up 14% 9% 3% 2% 72% Toothpaste Toothpowder Toothbrush Shaving Cream Others Source: Company Data and Team Estimates The company derives 90% of its revenues from the oral care segment consisting of toothpaste, toothpowder and toothbrush. In the personal segment the company s offerings include shower gel and cream, liquid hand wash, shaving cream, skin cream and dish wash. Toothpastes Toothbrushes Toothpowder Shower Gel Shower Crème Bar Soaps ORAL CARE Colgate Dental Cream, Colgate Total 12, Colgate Max Fresh, Colgate Kids Toothpaste, Colgate Fresh Energy Gel, Colgate Herbal, Colgate Cibaca Family Protection, Colgate Advanced Whitening, Colgate Active Salt Colgate Kids, Colgate 360, Colgate Navigator Plus, Colgate Sensitive, Colgate Super Junior Flexible, Colgate Extra Clean, Colgate Cibaca Top, Colgate Motion, Colgate Massager, Colgate Super Child Flexible, Colgate Super Flexible, Colgate Zig Zag Junior, Colgate Zig Zag, Colgate Zig Zag Plus Colgate Toothpowder PERSONAL CARE Palmolive Aroma Shower Gel( Sensual, Relax, Vitality) Palmolive Aroma Creme( Exotic and Calming) Palmolive Aroma Soap (Revive and Relax)

6 Liquid Hand Wash Palmolive Aroma Liquid Hand Wash Shaving Cream Palmolive Shave Cream Skin Cream Palmolive Charmis Cream HOUSEHOLD CARE Dish Wash Axion Dish Washing Paste Source: In addition to these products, Colgate also has oral pharmaceuticals products for mouth ulcer, tooth whitening, sensitivity treatment etc. INDUSTRY ANALYSIS Analysis of the Toothpaste Market in India The toothpaste market in India is worth around Rs cr. with a penetration of around 50%. Source: With only 50% of the population using toothpastes, per capita usage of toothpaste is much lower than even countries like China and Malaysia. India s per capita consumption of toothpaste is 90 gms per month whereas that of China and Malaysia is 219 and 285 gms per month.

7 However, the category has been growing and the penetration of both dentrifices and toothpastes has been increasing over the past few years. CATEGORY PENETRATION % Tooothpaste Dentrifice H YEAR Source: With rise in per capita incomes and awareness of oral hygiene, the growth potential is huge. Lower price and smaller packs are also likely to drive potential uptrading. The penetration levels have increased from 46% in 2004 to 51% in H If we take population as constant there has been a CAGR of 7.12% from 2004 to H The population of India is growing at an average annual growth rate of 1.6%. Thus, taking both these effects into consideration, we expect volumes of the toothpaste industry to grow by 8.84% p.a. in the near future. Competitor Analysis: Colgate has been present in the domestic oral care market for the past 70 years and its brand name Colgate is synonymous with its product category. It occupies a dominant position with 48% market share and its relative market share is 1.5 times the second player, HLL. HLL and Colgate control around 80% of the market with their 2 prominent toothpaste brands, Colgate and Pepsodent. Recently, with the acquisition of Balsara Dabur has managed to capture 7.2% of the market share and emerge as the third player. There are essentially 2 price points in this category. The normal segment consists of brands like Colgate, Pepsodent, Close-Up, Meswak, Vicco etc, whereas the low price segment has brands like Cibaca, Anchor and Babool. The company has launched 3 new products during the year Colgate Active Salt,

8 Colgate Advanced Whitening and Colgate Max Fresh Gel. These new releases along with a 4% hike in prices during the year have helped Colgate post 13.5% hike in sales. Source: Analyst Reports Analysis of the Toothpowder Market in India The toothpowder market in India is worth around Rs. 250 cr. and Colgate is the market leader in this segment with 44% market share. Its relative share is around 1.5 times the second player, Dabur. However, this market is declining, with penetration levels remaining at 35% for the last 3 years. This is primarily because people are shifting to toothpaste. Toothpowder Penetration % H Year Toothpowder Source:

9 Since the penetration levels have remained stagnant over the past few years, we do not expect any major growth in this segment. We have taken a CAGR of 1.6% for this segment considering the rise in volume only due to population growth. Analysis of the Toothbrush Market in India Colgate is the leader in the toothbrush category with 34% market share and almost 2 times bigger than the next player in the market. The toothbrush market is worth around Rs. 500 cr. its competitors include Dabur, Gillette and smaller players like Anchor. To estimate the likely growth in the toothbrush segment, we have assumed the penetration levels of the toothbrush segment to be the same as that of the toothpaste segment. Thus we are assuming that the brush segment would continue to grow at the same pace as the toothpaste segment i.e. 8.84% Other Product Categories In addition to the above segments, Colgate also has products such as shaving cream, shower gel, skin cream, liquid hand soap and dish wash paste. Also Colgate exports around Rs. 6 cr. worth of products which amounts to around 0.5% of its total turnover. CATEGORY VALUE SHARE (%) RANKING RELATIVE SHARE Toothpaste Toothpowder Toothbrush Shower Gel Liquid Hand Soap Shaving Cream Cold Cream Source:

10 DISTRIBUTION SYSTEM OF COLGATE A strong distribution network is the key to the success of an FMCG firm. Colgate has backed its products with a robust country-wide distribution network. Colgate is the second most widely distributed product of the company. It is further trying to improve its reach by tying up E-Choupal and Disha. SWOT ANALYSIS Strengths: One of the biggest strength of the company is the Colgate brand. This brand has become synonymous with toothpaste and this creates a formidable entry barrier for other firms to enter the toothpaste segment Colgate is the market leader in oral care in India with almost 50% share. Its share is 1.5 times the second largest player, HLL. In the toothpowder segment too, its relative share is 1.5 times the second largest player, Dabur. Weaknesses: Colgate derives almost 90% of its revenues from oral care business. Thus the profits of the company are totally dependant on one segment. However, it can change this by bringing out products under the personal care. Colgate has started moving in this direction by introducing products under the high-end products like shower gel and soap bars under the brand Palmolive Aroma Therapy Opportunity Although 75% of the households use toothpaste in urban areas, in the rural areas the penetration level is still at 40%. Toothpaste consumption in India is very low at 92 grams per household per month as against 219 grams per household per month in China. Threats Competition is increasing from Dabur since has acquired Balsara. Dabur has become the third largest player in the toothpaste segment with brands like Babool, Meswak and Promise and it currently commands a market share of 7.2%.

11 ASSUMPTIONS Industry Growth Assumptions Colgate-Palmolive is a FMCG company but is primarily in the oral care industry. Oral care accounts for over 95% of its gross revenues. The forecasts (for volumes only) for the various sub-segments within the industry take into account the following: Penetration levels: The penetration in the various sub-segments is expected to increase at historical levels ( H1; Sourced from Colgate investor presentation) Population Growth: Expected Indian population growth for the years (sourced from US Census Bureau) Toothbrush industry: The segment has been assumed to increase at the same pace as the toothpaste industry. This is because, as the penetration levels for the latter increase, people switch over to toothbrushes. Also reliable penetration numbers for toothbrushes were not available Shaving Cream: The growth forecasts have been taken from two sources, Enam and FICCI. There was a slight variation, between the two, hence an average of the two has been taken Company Growth Assumptions The company growth has been forecasted based on the following factors: Industry Growth: The forecasted industry growth for the various sub-segments Pricing: Colgate is expected to benefit from price increases in certain categories. This assumption is based on historical trend (over the last 6 quarters) and analyst expectations. However the pricing leverage is expected to tighten in the future, as competition from private labels is expected to increase in the FMCG space (AC Nielsen study) Gain in Market Share: The company is assumed to continue (at a decreasing pace) any market share gains/losses it has made historically (FY2004-YTD2006) Excise Savings: The Company s net sales are expected to increase as its toothpaste manufacturing plant is situated in tax free zone and is expected to go

12 on full production in Further it has been assumed that the company will scale up of the facility in the near future (based on analyst expectations and economic judgment) Earnings Model Assumptions For 2007, the raw material, advertisement and the overheads costs (% of net sales) are expected to be in line with the H results Going forward, the raw material and the overhead costs are expected to grow at the company s volumes growth The advertisement & selling expenses (% of net sales) are expected to be in line with the average of the last four quarters In 2007, the company is expected to make a capital expenditure of Rs. 500 million to expand the Baddi plant. The company is expected to make only routine capital expenditure over rest of the forecast horizon The company is expected to save income tax with the increased scale of production from it s Baddi plant (situated in a tax free zone in Himachal Pradesh) The company is expected to follow a consistent dividend policy, maintaining the same payout ratio as followed in FY2006 Valuation Methods There are two main valuation methodologies that have been used in our report Discounted Cash Flow: This model forecasts the free cash flow generated by the company and then takes out the present value of the cash flows using the weighted average cost of capital (WACC) for the company. This model is based on the premise that share price of a company should be equivalent to the present value of the future earnings of the company Intrinsic P/E: The intrinsic P/E model examines the forecasted earnings and growth rate, to determine the fundamental or intrinsic P/E value for a stock. The P/E value has two components: the cost of equity for the company and the growth

13 factor. The former is calculated, on the basis of the capital asset pricing model (CAPM), while the latter is based on the future growth potential of the company Po/E1 (Implied P/E) = 1/E(R) + FF*G; G = g/(e(r) - g); FF = 1/E(R) - 1/ROE; Where, Po/E1 is the Implied P/E E(R) is the cost of equity g is the growth factor, calculated as ROE*b ROE is the Return on Equity for 2007 b is the retention rate or 1-dividend payout ratio Other Models: There are some other models on the basis of which we have valued the company. However, there are some flaws to these models, as detailed below Industry P/E: We use the industry average P/E to arrive at the value of the company. The problem with this methodology is that markets might not value the peers properly and hence all the stocks might be overvalued. This will cause the industry P/E to be high as well, thus giving a high value to the company Industry EV/EBITDA: We use the industry average EV/EBITDA value to arrive at the Enterprise Value for the company. We can ascertain the equity value of the company after removing the net debt from the EV. This model faces the same problem as described above PEG Model: Using a rule of thumb, a stock with a PEG of 1 is considered to be rightly valued. Using the 2007 P/E and five year EPS growth, we calculate the PEG ratio for Colgate. Following the rule of thumb, we then set the PEG = 1 and arrive at an implied P/E ratio and hence arrive at a price level for the stock. The problem with this model is that PEG of 1 is a rule of thumb only and not necessarily based on empirical data

14 COMPANY VALUATION We have arrived at the valuation for Colgate, using two different models. Using the DCF and the intrinsic P/E model, we have arrived at a value of Rs per share and Rs per share respectively for Colgate-Palmolive. Since the current market price (Rs ) is above this, we give a SELL recommendation on the stock Discounted Cash Flow (DCF) Model (In Rs. Million) Colgate-Palmolive 2007E 2008E 2009E 2010E 2011E 2012E 2013E 2014E 2015E 2016E Sales 13, , , , ,094 20,621 22,065 23,609 25,026 26,527 YoY Change (%) 15.93% 13.63% 9.59% 8.94% 8.00% 8.00% 7.00% 7.00% 6.00% 6.00% EBITDA 2, , , , , , , , , ,040.2 Margin (%) 16.40% 18.13% 18.71% 18.89% 19.00% 19.00% 19.00% 19.00% 19.00% 19.00% Tax (395.9) (368.9) (497.7) (613.7) (1,187.4) (1,282.4) (1,372.2) (1,468.2) (1,556.3) (1,649.7) Other Inflow Total Cash Inflow 1, , , , , , , , , ,415.1 Capex (683.5) (183.5) (183.5) (183.5) (183.5) (183.5) (183.5) (183.5) (183.5) (183.5) Change in Working Capital Total Cash Outflow (597.8) (108.5) (111.5) (104.2) (104.2) (104.2) (104.2) (104.2) (104.2) (104.2) Free Cash Flow (FCF) 1, , , , , , , , , ,310.9 Source: Company Data, Team Estimates PV of Cash Flow = Rs. 14,491.7 million PV of Terminal Value = Rs. 21,098.7 million Total Present Value of Firm = Rs. 35,590.4 million Less: Net Debt (i.e. net of cash) = Rs million Equity Value = Rs. 34,754.3 million Shares outstanding = million Intrinsic Value per share = Rs Sensitivity Analysis Terminal Growth Share Price (Rs) Source: Team Estimates Cost of Equity Key Assumptions 9.50% 10% 10.50% 11% 11.50% 3% % % % % Terminal growth rate of cash flow = 5% Beta = (regressing against the BSE Sensex for 3 years) Risk Free Rate: 7.52% (10 year Government bond yield) Market Risk Premium = 5% Cost of Equity: 10.50% WACC (Discount rate) = 10.50% (assuming negligible debt)

15 Intrinsic P/E Model Po/E1 = 1/E(R)+FF*G; E(R) (Cost of Equity) 10.50% G = g/(e(r) -g) ROE (2007E) 54.6% = 1.73 b (Retention Rate) 12.2% FF = 1/E(R)-1/ROE g (ROE*b) 6.65% = 7.70 FF*G = Po/E1 = Target Price = Source: Team Estimates The DCF valuation model is among the most popular and fundamentally proven model used to value companies. Since the model uses cash flows to determine the value of a company, it is less susceptible to the vagaries of accounting policies followed the companies. Hence based on the DCF model we value the Colgate-Palmolive stock at Rs Besides the above two models, we can use a PEG model to value the company. However as state above, the PEG model is not empirically proven and is based only on a rule of thumb. Also we look at industry averages to arrive at a value for the Colgate stock. However, this model does not throw the correct value; as the market might have overvalued the other companies as well, resulting in an incorrect valuation for Colgate PEG Valuation Model PEG 2007 P/E Estimated EPS CAGR (06-10) Actual PEG % Required PEG 1 Required P/E E EPS Value of Share (Rs.) Source: Team Estimates

16 Peer Valuation To do a comparative valuation of the company, we look at the two of its main competitors in the oral care market viz. Hindustan Lever (HLL) and Dabur. Further, we take two more companies from the FMCG sector viz. Nestle (India) and Marico. At current prices, Colgate trades at 32x FY07 and 24x FY08 EPS, which is above and in line of its industry peers. However, based on a superior expected EPS growth (27% for FY06-08), the company s PEG ratio is lower than the industry average. Company Current Price EV/Book Value P/E EPS CAGR EV/Sales EV/EBITDA PEG 2007E 2008E (06-08) 2007E 2008E 2007E 2008E Colgate % HLL* % Dabur* % Nestle* % Marico* 1, % Industry Average Source: Company Data, Analyst Reports, Team Estimates * Consensus Data Colgate is trading at 19x FY08 EBITDA value, which is equivalent to the industry average. The Enterprise/Book Value for the company stands at 27. However, this multiple would not be appropriate to value to FMCG sector, as most of the value is derived from the brands owned (intangible asset) by the companies, which are not accounted for in the balance sheets of the companies

17 FINANCIAL ANALYSIS Quarterly Trends and Outlook Colgate-Palmolive has had a good year so far. Aided by price hikes and successful new launches, the topline grew by 17.4% (y-o-y) in the first half of FY07. The operating profit margin has increased by over 180 basis points in H1 07, vis-à-vis last year. The margins have increased due to excise duty benefits and lower advertising and promotion spending Topline Growth The company has achieved double digit topline growth in the last 5 quarters. This has been fuelled by successive 4% price hikes at the beginning of FY06 and FY07. Further, toothpaste and toothbrush sales have shown high volume growth. The first half of FY2007 saw a sale growth of 17.4%, with growth touching 20% in the first quarter. Volume growth was experienced in all the oral care segments. The toothbrush category grew by over 26%, increasing shift towards toothpaste segment. Colgate being the market leader is expected to be the biggest beneficiary. The company is expected to maintain its strong growth in the 2 nd half of the year Colgate: Value Growth by Category (YoY %) Toothpaste Toothpowder Toothbrush Total 60.0% 50.0% 40.0% 30.0% 20.0% 10.0% 0.0% -10.0% Q1 Q2 Q3 Q4 Q1 Q2 Q3E Q4E Source: Company Data, Team Estimates

18 Cost Analysis The company has experienced a decrease in material costs (as % of net sales) due to price hikes, over the last 6 quarters. The costs are expected to be stable in the 2 nd half of FY2007 Staff costs for the company have increased, due to increased training costs at the Baddi plant. However, going forward, the costs are expected to come down In the 2 nd quarter, the company paid VRS to its employees in the Sewri plant in Mumbai. All the 263 employees accepted the VRS, entailing an outgo of Rs. 588mn (Rs.273.6mn net of tax). However, the company is expected to benefit from lower staff costs in the future The advertising & promotion spend (A&P) has fallen by 550 basis points in Q2 over Q2 FY06. Lack of new product launches caused a lower spending. In the coming two quarters, the A&P spending is expected to return to the median levels The overheads increased sharply in H1 over last year due to increased power and freight costs incurred due to scaling up of operations at the Baddi plant in HP. Now with the plant operating at full capacity, the overheads are expected to remain at high levels in the 2 nd half of the FY2007 Colgate: Cost Analysis (as % of net sales) Raw Materials Staff A&P Overheads 100% 10.1% 11.2% 11.3% 14.4% 16.3% 15.2% 15.7% 15.7% 80% 60% 17.7% 7.8% 18.5% 7.9% 14.4% 8.7% 19.7% 6.4% 18.3% 8.7% 13.0% 9.3% 15.6% 8.3% 15.6% 8.3% 40% 20% 48.3% 46.8% 40.7% 44.3% 43.8% 43.5% 43.6% 43.6% 0% Q1 Q2 Q3 Q4 Q1 Q2 Q3E Q4E Source: Company Data, Team Estimates

19 Profit Analysis The company has experienced a growth in margins, due to excise benefits and better price realizations. In Q2, the EBIT has increased by 340 basis points over the comparable period last year. Lower advertisement expenses (550bps), raw material cost (270bps) and reduced outsourcing (60bps) contributed to the margin expansion. A sharp rise in overheads (340bps) restricted further margin expansion though Colgate: Margin & Sales Evolution 4, , , , , , , % 25.0% 20.0% 15.0% 10.0% 5.0% Net Sales EBITDA Margin - Q1'06 Q2'06 Q3'06 Q4'06 Q1'07 Q2'07 Q3E'07 Q4E'07 0.0% Annual Forecasts Growing Volumes & Pricing Issues Colgate is expected to grow due to increasing industry volume growth, better price realizations and expected market share gains due to new launches. Growing Volumes The toothpaste, toothbrush and the shaving cream industry are forecasted to achieve good volume growth. In the toothpaste segment, the company is expected to grow on the back of successful product launches. The new launches - Colgate Advanced Whitening and Colgate Active Salt and New Colgate Max Fresh, have gained a 4% share in the market

20 The company is expected to gain market share on the back of successful launch of new products, thus driving the volumes After a negative growth, the toothpowder segment is expected to maintain low but positive growth. This is due to the successful re-launch of the Colgate Red toothpowder Better Price Realizations & Rise of Private labels Colgate increased the prices of its toothpastes by 4% in the beginning of FY2006 and FY2007. Due to good demand growth and better positioning, we believe that the company would be able to sustain these annual price hikes, although at a decreasing level. Small price hikes are also expected in the toothbrush and powder category However, going forward, the company is expected to face increased competitive pressures, due to emergence of private labels. Retailing in India is expected to undergo a major change with the entry of major players such as Reliance and Bharti - Wal-Mart and scaling up of incumbent players such as Pantaloons, Trent, and Shoppers Stop. The share of organized players in the USD 210bn retail industry is expected to increase from the current 3% to 10% by 2010E. According to an AC Nielsen study on private labels of 80 categories across 38 countries, most of them from Europe, in 2005, retailers tend to create powerful brands that meet consumers needs and hence, grab a significant pie of the market. Value Shares of private labels by category (%)

21 Colgate: Contribution to Sales growth - By category 100% 80% 6.4% 20.6% 41.4% 32.4% 0.0% 60% 40% 20% 73.0% 11.1% 47.5% 69.6% 118.1% Market Share Gain Pricing Industry Growth 0% -20% -2.0% Toothpaste Toothpowder Toothbrush Shaving -18.1% Cream Source: Team Estimates Excise & Tax Benefits The company has been able to get major tax and excise benefits as it has shifted major part of its toothpaste production to Baddi, a tax free zone in Himachal. The company set up the Baddi plant at a cost of Rs. 105 crore, and the plant started production in April In FY2006, the plant ran at 2/3 rd of its 24,000 tonnes capacity. The benefits \of the plant are as follows: Excise Benefits: No excise duty for the first 10 years of operation. The company will be able to save 16% excise duty charged on the toothpaste (duty is charged after a 35% abatement on the MRP) Tax Benefits: 100% income tax will be exempt for the first five years. 30% income tax will be exempt in the subsequent years We expect the plant to run at full capacity in FY2007. Further, with the closing of the Sewri plant in Mumbai, Baddi is the only toothpaste producing plant for Colgate. We expect the company to expand capacity of the Baddi plant by We estimate that they will enhance capacity by 50% to 36,000 tonnes. This expectation is based on company and analyst comments. With increased production, the company is expected to increase the excise and tax benefits derived from the unit in the future

22 Baddi Unit: Excise & Tax Benefits FY2005 FY2006 FY2007E FY2008E FY2009E FY2010E Total Production (tn) Baddi Unit (tn) Share (%) 0.00% 32.09% 43.37% 59.14% 54.36% 49.96% Excise as % of sales 10.07% 7.67% 6.80% 5.57% 5.89% 6.21% Effective Tax Rate (%) 39.14% 24.83% 17.72% 12.85% 15.62% 17.65% Source: Company Data, Team Estimates Power and Freight Costs The shift of production to the Baddi unit, will cause a rise in the freight and power costs for the company. However, the fiscal benefits will more than over come the rising costs of the production from the unit Freight and Power costs are expected to increase Power & Fuel Freight Source: Company Data, Team Estimates Rising Profits EBITDA is expected to increase by 160 basis points from FY06 to FY10E. This is because of lower excise and better price realizations, expected in the future. The PAT will also rise by 260 basis points during the same year, due to lower tax outgo.

23 Profits are expected to rise 20.00% 19.00% 18.00% 17.00% 16.00% 15.00% 14.00% 13.00% 12.00% 11.00% 10.00% FY2006 FY2007E FY2008E FY2009E FY2010E EBITDA PAT Source: Company Data, Team Estimates PROJECTED FINANCIALS Projected Income Statement (in Rs mn) Colgate FY 06 FY 07E FY 08E FY 09E FY 10E Toothpaste Toothpowder Toothbrush Shaving Cream Others Gross Sales Excise Net Sales Raw Mat Staff Advert Spend Others EBITDA Depreciation Other Income EBIT Interest PBT Tax PAT Extraordinary Items Adjusted PAT Dividends EPS Source: Team Estimates, Company Data

24 Projected Balance Sheet (in Rs mn) FY 06 FY 07E FY 08E FY 09E FY 10E Share Capital Reserves Net Worth Loans Total Liabilities Net Fixed Assets Investments Cash & Bank Balances Other Current Assets Total Current Assets Current Liabilities Provisions Total Current Liabilities Net Current Assets Deferred Liability (Net) Total Assets Source: Team Estimates, Company Data Projected Cash Flow Statement (in Rs mn) Cash Flow FY 06 FY 07E FY 08E FY 09E FY 10E Pre Tax Profit 1, , , , ,157.8 Depreciation Interest Expense Change in WC Others (136.3) (147.3) (147.3) (147.3) (147.3) Total Tax Paid (684.8) (395.9) (368.9) (497.7) (613.7) Cash Flow from Operations 1, , , , ,829.7 Capital Expenditure (428.9) (683.5) (183.5) (183.5) (183.5) Change in Investments (105.9) Interest Received Cash Flow From Investing (374.9) (523.6) (23.6) (23.6) (23.6) Equity Raised Debt Raised Interest Paid (5.9) (6.0) (6.0) (6.0) (6.0) Dividend (1,151.1) (1,399.0) (1,874.6) (2,070.5) (2,234.1) Cash Flow From Financing (1,153.2) (1,405.0) (1,880.6) (2,076.5) (2,240.1) Net Change in Cash (76.88) FCF 1, , , , , Source: Team Estimates, Company Data

25 Projected Key Ratios Ratios FY 06 FY 07E FY 08E FY 09E FY 10E ROE (%) ROCE (%) EBIT margin EBITDA margin Net margin Asset Turnover D/E Source: Team Estimates, Company Data