INSTITUTIONAL EQUITY RESEARCH Colgate Palmolive (CLGT IN) Volume growth revival is the biggest positive INDIA FMCG Quarterly Update Top takeaways from Q2FY19 In line results. Benefits of gross margin improvement (+140bps yoy) and savings in manpower costs were negated by higher A&P costs (+17% yoy) for its natural portfolio and Colgate CDC a key product. We believe volume growth of 7% vs. consensus expectation of 4-5% was the biggest positive in otherwise in line results. Management attributed strong volume growth led by traction 1) in its natural s portfolio 2) re-launch of Colgate CDC, and 3) increased promotion in select offerings. However, volumes on CAGR basis remained subdued (3% only) and we need to wait for a few more quarters to understand whether this kind of volume growth is sustainable, because 3QFY19 will face high base (12% volume growth in 3QFY18). Colgate Swarna Vedshakti (natural s portfolio) is gaining traction due to launch in multiple packs at different price points and a pan-india launch (with 10% price cuts) vs. the earlier restricted to South and west India Colgate has recently launched a new premium Superflexi Sensitive toothbrush at a price point of Rs 25. Market-share story a mixed bag: Although it is early days and market-share gains seems miniscule, share in the toothpaste segment increased to 52.5% in 1HFY19 from 52.4% in Jan-June 2018 while in the toothbrush segment, it declined to 44.2% from 44.6%. Maintain Buy We continue to remain positive about Colgate, as we believe that the worst market share losses are behind us, and the management s strategy (of re-gaining market share by building up its natural s portfolio) has started yielding initial results. We will keep a close eye on sustainability of toothpaste volume growth in coming quarters. We maintain BUY with a target of Rs 1,190 (35x Dec-20 EPS). 29 October 2018 BUY (Maintain) CMP RS 1100 / TARGET RS 1190 (8%) COMPANY DATA O/S SHARES (MN) : 272 MARKET CAP (RSBN) : 301 MARKET CAP (USDBN) : 4 52 - WK HI/LO (RS) : 1274 / 1008 LIQUIDITY 3M (USDMN) : 7.7 PAR VALUE (RS) : 1 SHARE HOLDING PATTERN, % Sep 18 Jun 18 Mar 18 PROMOTERS : 51.0 51.0 51.0 FII / NRI : 13.6 11.9 13.0 FI / MF : 12.9 15.1 13.8 NON PRO : 2.1 2.2 2.0 PUBLIC & OTHERS : 20.3 19.8 20.1 KEY FINANCIALS Rs mn FY19E FY20E FY21E Net Sales 45,971 50,504 55,493 EBIDTA 12,867 14,239 15,762 Net Profit 7,364 8,540 9,479 EPS, Rs 27.1 31.4 34.8 PER, x 38.8 35.0 31.6 EV/EBIDTA, x 22.7 20.5 18.5 P/BV, x 19.8 20.7 21.2 ROE, % 51.0 59.0 67.0 Vishal Gutka Preeyam Tolia Key risk to our call Colgate s inability to position itself as ayurvedic brand and subsequent failure to gain market share in the toothpaste segment. (Rs mn) 2QFY19 2QFY18 yoy 1QFY19 qoq PC yoy growth Comments growth % estimates % Volume 7.0 (0.9) 4.0 Volume growth on back of traction in naturals portfolio Net Sales 11,606 10,780 7.7 10,336 12.3 7.6 Gross Profits 7,491 6,810 10.0 6,786 10.4 6.9 Gross Margin (%) 64.5 63.2 137 bps 65.7-111 bps -41 bps Staff costs 764 823 (7.2) 749 2.0 - Ad spends 1,389 1,192 16.5 1,435 (3.2) 10.0 Other operating expenses 2,116 1,858 13.9 1,863 13.6 5.0 EBITDA 3,296 3,006 9.6 2,816 17.0 8.8 EBITDA margin (%) 28.4 27.9 51 bps 27.2 115 bps 30 bps PBT 2,984 2,703 10.4 2,855 4.5 8.4 Tax rate (%) 34 34-12 bps 34 57 bps 0 bps PAT 1,964 1,776 10.6 2,236 (12.2) 8.4 Page 1 PHILLIPCAPITAL INDIA RESEARCH
Volume growth sustained on traction from naturals portfolio and increased marketing efforts in core portfolio Volume (%) Toothpaste marketshare (%) 15.0 10.0 5.0 0.0-5.0-10.0 6.0 4.0-3.0-5.0-0.9 12.0 4.0 4.0 7.0 57.0 56.0 55.0 54.0 53.0 52.0 51.0 55.9 55.7 55.4 55.1 54.3 54.0 53.7 53.4 52.4 52.5-15.0-13.0 50.0 Source: Company, PhillipCapital India Research Estimates Toothbrush marketshare (%) 48.0 47.0 46.8 46.6 47.0 47.4 46.0 45.0 44.0 45.0 45.5 45.1 44.8 44.6 44.2 43.0 42.0 Source: Company, PhillipCapital India Research Estimates Page 2 PHILLIPCAPITAL INDIA RESEARCH
Financials Income Statement Y/E Mar, Rs mn FY18 FY19E FY20E FY21E Net sales 41,594 45,971 50,504 55,493 Growth, % 5 11 10 10 Other operating income 285 314 345 380 Total income 41,880 46,285 50,849 55,873 Raw material expenses -14,901-16,167-17,784-19,562 Employee expenses -3,059-3,182-3,500-3,850 Other Operating expenses -12,796-14,069-15,326-16,698 EBITDA (Core) 11,124 12,867 14,239 15,762 Growth, % 17.9 15.7 10.7 10.7 Margin, % 26.7 28.0 28.2 28.4 Depreciation -1,565-1,661-1,815-1,969 EBIT 9,559 11,206 12,424 13,794 Growth, % 18.0 17.2 10.9 11.0 Margin, % 23.0 24.4 24.6 24.9 Other Income 388 398 438 481 Non-recurring Items 117-341 0 0 Pre-tax profit 10,063 11,263 12,862 14,275 Tax provided -3,097-3,899-4,322-4,796 Profit after tax 6,967 7,364 8,540 9,479 Net Profit 6,967 7,364 8,540 9,479 Growth, % 18.6 12.5 10.8 11.0 Net Profit (adjusted) 6,850 7,705 8,540 9,479 Unadj. shares (m) 272 272 272 272 Wtd avg shares (m) 272 272 272 272 Balance Sheet Y/E Mar, Rs mn FY18E FY19E FY20E FY21E Cash & bank 4,562 4,871 5,034 5,724 Debtors 2,010 1,763 1,937 2,129 Inventory 2,267 2,506 2,491 2,433 Loans & advances 906 906 906 906 Other current assets 862 862 862 862 Total current assets 10,607 10,908 11,230 12,054 Investments 312 312 312 312 Gross fixed assets 15,455 16,955 18,455 19,955 Less: Depreciation -3,996-5,657-7,472-9,440 Add: Capital WIP 1,586 1,586 1,586 1,586 Net fixed assets 13,045 12,884 12,569 12,101 Non-current assets 653 653 653 653 Total assets 25,639 25,779 25,786 26,141 Current liabilities 9,828 10,107 10,740 11,437 Provisions 191 191 191 191 Total current liabilities 10,019 10,298 10,931 11,628 Non-current liabilities 374 374 374 374 Total liabilities 10,393 10,671 11,305 12,002 Paid-up capital 272 272 272 272 Reserves & surplus 14,974 14,836 14,209 13,867 Shareholders equity 15,246 15,108 14,481 14,139 Total equity & liabilities 25,639 25,779 25,786 26,141 Cash Flow Y/E Mar, Rs mn FY18E FY19E FY20E FY21E Pre-tax profit 10,063 11,263 12,862 14,275 Depreciation 1,565 1,661 1,815 1,969 Chg in working capital -465 287 474 564 Total tax paid -3,223-3,899-4,322-4,796 Cash flow from operating activities 7,940 9,312 10,829 12,011 Capital expenditure -1,863-1,864-1,500-1,500 Chg in marketable securities -711 247-174 -191 Cash flow from investing activities -2,574-1,617-1,674-1,691 Free cash flow 5,366 7,695 9,156 10,320 Equity raised/(repaid) 3 0 0 0 Dividend (incl. tax) -4,256-8,184-9,166-9,821 Cash flow from financing activities -4,253-8,184-9,166-9,821 Net chg in cash 1,113-489 -11 499 Valuation Ratios FY18E FY19E FY20E FY21E Per Share data EPS (INR) 25.6 27.1 31.4 34.8 Growth, % 18.6 12.5 10.8 11.0 Book NAV/share (INR) 56.1 55.5 53.2 52.0 FDEPS (INR) 25.2 28.3 31.4 34.8 CEPS (INR) 30.5 35.7 38.1 42.1 CFPS (INR) 27.7 32.8 38.2 42.4 DPS (INR) 13.0 25.0 28.0 30.0 Return ratios Return on assets (%) 28.6 28.6 33.1 36.5 Return on equity (%) 44.9 51.0 59.0 67.0 Return on capital employed (%) 47.9 46.8 55.6 63.7 Turnover ratios Asset turnover (x) 4.7 5.1 6.0 7.4 Sales/Total assets (x) 1.7 1.8 2.0 2.1 Sales/Net FA (x) 3.2 3.5 4.0 4.5 Working capital/sales (x) (0.1) (0.1) (0.1) (0.1) Receivable days 17.6 14.0 14.0 14.0 Inventory days 19.9 19.9 18.0 16.0 Payable days 72.9 70.2 70.4 70.6 Working capital days (33.2) (32.3) (32.8) (33.6) Liquidity ratios Current ratio (x) 1.1 1.1 1.0 1.1 Quick ratio (x) 0.8 0.8 0.8 0.8 Net debt/equity (%) (29.9) (32.2) (34.8) (40.5) Valuation PER (x) 43.7 38.8 35.0 31.6 PEG (x) - y-o-y growth 2.3 3.1 3.2 2.9 Price/Book (x) 19.6 19.8 20.7 21.2 EV/Net sales (x) 7.0 6.4 5.8 5.3 EV/EBITDA (x) 26.3 22.7 20.5 18.5 EV/EBIT (x) 30.6 26.1 23.5 21.1 Source: Company, PhillipCapital India Research Estimates Page 3 PHILLIPCAPITAL INDIA RESEARCH
Stock Price, Price Target and Rating History 1300 B (TP 1350) 1100 900 N (TP 945) B (TP 1000) B (TP 1000) B (TP 960) B (TP 1110) B (TP 1110) B (TP 1070) B (TP 1090) B (TP 1200) B (TP 1150) B (TP 1275) 700 500 O-15 D-15 J-16 M-16 A-16 J-16 J-16 S-16 O-16 D-16 J-17 M-17 A-17 J-17 J-17 S-17 O-17 D-17 J-18 M-18 A-18 J-18 J-18 S-18 Rating Methodology We rate stock on absolute return basis. Our target price for the stocks has an investment horizon of one year. Rating Criteria Definition BUY >= +15% Target price is equal to or more than 15% of current market price NEUTRAL -15% > to < +15% Target price is less than +15% but more than -15% SELL <= -15% Target price is less than or equal to -15%. Page 4 PHILLIPCAPITAL INDIA RESEARCH
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