Colgate-Palmolive. Q3FY17 Result Update Steep decline in Sales; EBITDA margin contraction continues. Sector: FMCG CMP: ` 879. Recommendation: HOLD

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Colgate-Palmolive Q3FY17 Result Update Steep decline in Sales; EBITDA margin contraction continues Sector: FMCG CMP: ` 879 Recommendation: HOLD Market Statistics Current stock price (`) 879 Shares O/S (cr.) 27.2 Mcap (`cr) 23,905 52W H/L (`) 1,033 6m avg. volume 307,940 Bloomberg Shareholding pattern CLGT in Promoters 51.00 Domestic Institution 8.49 Foreign Institution 16.20 Non-institution 24.31 of which more than 1% Life Insurance Corporation of India 5.22 Arisaig Partners (Asia) Pte Ltd A/c Arisaig India Fund Ltd 3.38 Colgate vs Nifty 116 104 92 Colgate Capital efficiency & valuations Nifty 80 Jan-15 May-15 Sep-15 Jan-16 Particulars FY17E FY18E FY19E RoE (%) 50.7 50.7 50.4 RoCE (%) 85.4 83.0 79.5 P/B (x) 20.6 18.2 16.0 EV/OCF (x) 31.8 27.7 24.1 EV/EBITDA (x) 23.9 21.5 19.5 P/E (x) 40.7 35.8 31.7 Associate Ritu Chaudhary +91-2242245183 ritu.chaudhary@trustgroup.co.in Colgate, based on IND AS, reported Sales de-growth of 8.6% to `8.7bn much lower than our expectation of 4.0% YoY growth. Volume Market share declined by 30bps on QoQ basis in toothpaste to 55.4% while in toothpowder segment market share increased by 40bps to 47% Gross Margin expanded by 76bps to 63.9%. Employee & other expenses increased strongly by 57bps & 212bps (% of sales). A&P expenses contracted by 146bps to 9.6% of sales. Hence, EBITDA Margin slid by 47bps YoY to 24.5%. EBITDA de-grew healthy by 10.3% to `2.1bn lower than our expectation of `2.3bn Higher ETR of 33.0% vs. 24.6% last year further impacted PAT. Hence, APAT declined of 23.4% to `1,260mn. Sluggish sales; Market share declines QoQ: We believed Colgate should have been least impacted due to demonetization drive considering the essential nature of the product. But, sales decline of 8.6% resembles that pressure in volumes is combination of increase in competitive intensity & trade channel disruption due to liquidity crunch. It also portrays that there is the structural slowdown in volumes and way behind in comparison of historic double digit volumes. Company took price hike of 4-5% in last quarter and we believe, Colgate would have restricted further rate hikes in Q3FY17.Market share declined by 30bps on QoQ basis in toothpaste while in toothpowder segment it has increased by 40bps. A&P spends calibrated & de-grew by 20.7% in Q3FY17, it was growing at >25% rate from three qtrs largely to support new launches. However, its translation into volumes is yet to come. We expect volume growth to gradually pick up in ensuing qtrs on account of favorable base, improving liquidity and support of new launches. But it would largely at 6-8% volume growth. Measures undertaken to deal with Demonetization event: Company took proactive measures to combat the demonetization situation like 1) Supported business partners to ensure ease of business 2) Extended credit to customers, provided additional incentives 3) Gave Advanced payments to supply chain partners. EBITDA margins blips by 47ps to 24.5% in Q3FY17: Gross Margin increased by 76bps to 63.9% in Q3Y17 driven by input cost softening & product mix advantage. Although, A&P spend contracted by 147bps, rise in employee & other expenses by 57bps to 212bps hampered the EBITDA margins. Urban recovery to support premium segment: Colgate continues to remain focus in growing Oral care category by launching new products in toothpaste largely focusing on Natural & Herbal space. Hence, volume growth can be better in the medium term. Contribution of premium products has improved significantly from 15.9% in FY12 to 25.5% in 2015. As most of the new launches are in the mid-topremium segment, expected urban recovery in the coming quarters would support the overall growth. Outlook & Valuation: Stiff competition, rising taxes & weak category growth has resulted into Colgate s high double digit sales growth into low single digit growth during FY16. Considering the dynamics, we believe Colgate s historical high double digit growth would be difficult to achieve in the medium term. We expect 11-12% sales growth during FY17-18 on account of new launches, pickup in category growth and favorable base. We expect Colgate would be able to maintain high EBITDA Margin of 22.5%-23% during FY17-19. Colgate trades at a high P/E of 35.8x & 31.7x of FY18& FY19 EPS and captures most of the medium term triggers. Hence, we maintain HOLD rating on the stock.

Quarterly Performance Particulars (`mn) Q3FY16 Q2FY17 Q3FY17 YoY change (%) Gross Sales 10,734 11,949 9,816-8.6% Other Operating Income 84.9 82.6 96.0 13.1% Net Sales(excluding Excise Duty) 9,568 10,566 8,746-8.6% Total RM 3,528.7 3,909.2 3,158.9-10.5% Gross Profit 6,040 6,657 5,587-7.5% Gross Profit Margin % 63.1% 63.0% 63.9% 76bps Employee Expenses 659 731 652-1.0% % of net sales 6.9% 6.9% 7.5% 57bps A&P 1,058 1,280 839-20.7% % of net sales 11.1% 12.1% 9.6% -147bps Other Expenses 1,936 1,898 1,955 1.0% % of net sales 20.2% 18.0% 22.4% 212bps EBITDA 2,387 2,748 2,141-10.3% EBITDA Margin % 24.9% 26.0% 24.5% -47bps EBIT 2,190 2,528 1,908-12.9% EBIT Margin % 22.9% 23.9% 21.8% -107bps PBT 2,190 2,528 1,908-12.9% Total tax 539 714 630 16.9% Effective tax % 24.6% 28.3% 33.0% 840bps Reported PAT 1,651 1,814 1,278-22.6% Adjusted PAT 1,644 1,808 1,260-23.4% Source: Company, Trust Exhibit 1: Volume Market Share Trend Market Share Jun'14 Sep'14 Dec'14 Apr'15 Jun'15 Sep'15 Dec'15 Mar-16 Jun-16 Sep-16 Dec-16 Toothpaste 57.0% 56.7% 56.7% 57.8% 57.9% 57.6% 57.3% 55.3% 55.9% 55.7% 55.4% Toothbrush 42.6% 42.6% 42.4% 42.1% 42.7% 43.3% 43.8% 45.8% 46.8% 46.6% 47.0% Source: Company, Trust 2

Financials Income Statement Y/E Mar (`mn) FY15 FY16 FY17E FY18E FY19E Net Revenues 39,819 41,623 43,450 47,335 52,889 % Growth 11.3 4.5 4.4 8.9 11.7 Raw Material 14,677 14,953 15,310 16,680 18,911 Staff 2,589 2,698 3,512 3,779 4,223 Other Expenses 14,331 14,659 14,722 15,946 17,868 Total Expenditures 31,598 32,310 33,544 36,405 41,002 EBITDA 8,222 9,313 9,906 10,929 11,887 % Growth 23.9 13.3 6.4 10.3 8.8 EBITDA Margins (%) 20.6 22.4 22.8 23.1 22.5 Other Income 332 396 404 605 858 Interest - - - - - Depreciation 750 1,114 1,428 1,515 1,601 Profit Before Tax 7,803 8,281 8,881 10,020 11,144 Provision for tax 2,214 2,516 2,975 3,306 3,566 Effective tax rate (%) 28.4 30.4 33.5 33.0 32.0 Reported PAT 5,589 5,765 5,906 6,713 7,578 % Growth 3.6 3.1 2.4 13.7 12.9 Adjusted Net Profit 5,589 5,960 5,868 6,673 7,533 % Growth 13.7 6.6 (1.5) 13.7 12.9 Balance Sheet Y/E Mar (`mn) FY15 FY16 FY17E FY18E FY19E Equity Share Capital 136 272 272 272 272 Reserves & surplus 7,567 9,923 11,309 12,886 14,665 Shareholders' funds 7,703 10,195 11,581 13,158 14,937 Minorities interests - - - - - Total Debt 15 17 17 17 17 Capital Employed 7,719 10,212 11,598 13,175 14,954 Net fixed assets 9,228 10,865 13,437 13,022 12,520 Cash & Cash Eq. 2,545 2,883 1,321 3,046 5,277 Net Other current assets (4,399) (3,621) (3,743) (3,977) (4,427) Investments 371 301 801 1,301 1,801 Net Deferred tax Assets (26) (217) (217) (217) (217) Total Assets 7,718 10,211 11,598 13,175 14,954 3

Cash Flow Statement Y/E Mar (` mn) FY15 FY16 FY17E FY18E FY19E Pre-tax profit 7,804 8,595 8,881 10,020 11,144 Depreciation 750 1,114 1,428 1,515 1,601 Total Tax Paid (2,055) (2,836) (2,975) (3,306) (3,566) Chg in working capital 49 155 122 234 450 Other operating activities (259) (214) - - - Cash flow from oper (a) 6,289 6,814 7,457 8,462 9,629 Capital Expenditure (2,994) (2,713) (4,000) (1,100) (1,100) Chg in investments - 70 (500) (500) (500) Other investing activities 278 277 - - - Cash flow from inv.(b) (2,716) (2,366) (4,500) (1,600) (1,600) Free cash flow (a+b) 3,573 4,448 2,957 6,862 8,029 Equity raised/(repaid) - - - - - Debt raised/(repaid) - - - - - Interest paid - (771) - - - Dividend (incl. Tax) (3,848) (2,987) (4,482) (5,097) (5,753) Other financing activities - - - - - Cash flow from fin. (c) (3,848) (3,758) (4,482) (5,097) (5,753) Net chg in cash (a+b+c) (275) 690 (1,525) 1,766 2,276 Key Ratios Y/E Mar FY15 FY16 FY17E FY18E FY19E Raw Material Cost/Sales (%) 36.9 35.9 35.2 35.2 35.8 Manpower Cost/Sales (%) 6.5 6.5 8.1 8.0 8.0 Operating & Other Cost/Sales (%) 36.0 35.2 33.9 33.7 33.8 Revenue Growth (%) 11.3 4.5 4.4 8.9 11.7 EBITDA Margins (%) 20.6 22.4 22.8 23.1 22.5 Net Income Margins (%) 14.0 14.3 13.5 14.1 14.2 ROCE (%) 106.5 91.2 85.4 83.0 79.5 ROE (%) 72.6 58.5 50.7 50.7 50.4 Valuation Parameters Y/E Mar FY15 FY16 FY17E FY18E FY19E EPS (`.) 20.5 21.9 21.6 24.5 27.7 P/E (x) 45.0 38.4 40.7 35.8 31.7 BV (`) 28.3 37.5 42.5 48.3 54.9 P/BV (x) 32.7 22.4 20.6 18.2 16.0 EV/EBITDA (x) 30.2 24.2 23.9 21.5 19.5 Fixed assets turnover ratio (x) 4.3 3.8 3.2 3.6 4.2 Net Debt/Equity (x) (0.3) (0.3) (0.1) (0.2) (0.4) EV/Sales (x) 6.2 5.4 5.5 5.0 4.4 4

Institutional Equity Team Names Designation Sectors Email ID's Desk-Number Naren Shah Head Of Equity naren.shah@trustgroup.in +91-22-4084-5074 Institutional Sales SriramRangarajan Sales sriram.rangarajan@trustgroup.in +91-22-4224-5216 Vivek Kumar Sales vivek.kumar@trustgroup.in +91-22-4224-5197 Sales Trading & Dealing Rajesh Ashar Sales Trader rajesh.ashar@trustgroup.in +91-22-4224-5123 Nikhil Shah Dealer nikhil.shah@trustgroup.in +91-22-4084-5089 Bhavin Sanghavi Dealer bhavin.sanghavi@trustgroup.in +91-22-4224-5055 Dealing Desk trustfin@bloomberg.net +91-22-4084-5089 Research Team Binyam Taddese Analyst Rates & Credit Research binyam.taddese@trustgroup.in +91-22-4224-5037 Naushil Shah Analyst Technology, Media & Telecom naushil.shah@trustgroup.in +91-22-4224-5125 RituChaudhary Associate FMCG &Consumer Durable ritu.chaudhary@trustgroup.in +91-22-4224-5183 DISCLAIMER We are committed to providing completely independent and transparent recommendations to help our clients reach a better decision. This document is provided for assistance only and is not intended to be and must not alone be taken as the basis for an investment decision. Nothing in this document should be construed as investment or financial advice, and nothing in this document should be construed as an advice to buy or sell or solicitation to buy or sell the securities of companies referred to in this document. The intent of this document is not in recommendary nature. The recipient of this document should make such investigations as it deems necessary to arrive at an independent evaluation of an investment in the securities of companies referred to in this document (including the merits and risks involved), and should consult its own advisors to determine the merits and risks of such an investment. The investment discussed or views expressed may not be suitable for all investors. Trust Financial Consultancy Services Pvt. Ltd. has not independently verified all the information given in this document. Accordingly, no representation or warranty, express or implied, is made as to the accuracy, completeness or fairness of the information and opinions contained in this document. The Company reserves the right to make modifications and alternations to this statement as may be required from time to time without any prior approval. Trust Financial Consultancy Services Pvt. Ltd., its affiliates, their directors and the employees may from time to time, effect or have effected an own account transaction in, or deal as principal or agent in or for the securities mentioned in this document. They may perform or seek to perform investment banking or other services for, or solicit investment banking or other business from, any company referred to in this report. Each of these entities functions as a separate, distinct and independent of each other. The recipient should take this into account before interpreting the document. This report has been prepared on the basis of information, which is already available in publicly accessible media or developed through analysis of Trust Financial Consultancy Services Pvt. Ltd. The views expressed are those of analyst and the Company may or may not subscribe to all the views expressed therein. Neither the Firm, not its directors, employees, agents or representatives shall be liable for any damages whether direct or indirect, incidental, special or consequential including lost revenue or lost profits that may arise from or in connection with the use of the information. This document is being supplied to you solely for your information and may not be reproduced, redistributed or passed on, directly or indirectly, to any other person or published, copied, in whole or in part, for any purpose. Copyright in this document vests exclusively with Trust Financial Consultancy Services Pvt. Ltd. 5