BSE SENSEX S&P CNX 24,492 7,438 Bloomberg CLGT IN Equity Shares (m) 272.0 M.Cap.(INRb)/(USDb) 232.5 / 3.4 52-Week Range (INR) 1099 / 852 1, 6, 12 Rel. Per (%) -8/-6/6 12M Avg Val (INR M) 376 Free float (%) 49.0 Financials & Valuation (INR b) Y/E Mar 2015 2016E 2017E Net Sales 39.5 40.9 45.5 EBITDA 8.3 9.7 10.9 PAT 5.6 6.0 6.8 EPS (INR) 20.6 22.0 25.2 Gr. (%) 13.9 7.1 14.3 BV/Sh (INR) 28.3 32.4 37.0 RoE (%) 81.6 72.6 72.6 RoCE (%) 111.3 104.5 103.3 P/E (x) 41.6 38.8 34.0 P/BV (x) 30.2 26.4 23.1 Estimate change TP change Rating change 27 January 2016 3QFY16 Results Update Sector: Consumer Colgate CMP: INR855 TP: INR980(+14%) Neutral Volume growth at decadal low Colgate s net sales grew 1.8% YoY to INR10.1b (est. of INR 10.5b), with modest 1% volume growth (10-year low) in the Toothpaste segment (below our expectation of 4.5%). We believe heightened competitive intensity and sluggish market growth is hurting Toothpaste volumes. Organic sales growth was 7%, offset by phasing out of fiscal benefits in Himachal Pradesh. EBITDA grew 18.9% YoY to INR2.3b (est. of INR2.2b) and adj. PAT 7.9% to 1.4b (est. INR1.5b). Toothpaste market share up YoY but down QoQ: Volume market share was up 60bp YoY in the Toothpaste segment but down 30bp QoQ. Toothbrush volume market share was 43.8%, up 140bp YoY during Jan-Dec 15. Gross margin expanded 120bp YoY to 64.7% (est. of 64.3%). Savings in ad spends (down 230bp YoY) and lower other expenses (down 30bp YoY) were partially offset by higher staff costs (up 50bp YoY), resulting in sharp EBITDA margin expansion (330bp YoY to 22.8%). Thus EBITDA grew 18.9% YoY to INR2.3b (est. of INR2.2b). However, higher depreciation expense (up 46% YoY) and increased tax rate (up 490bp YoY) dragged down adj. PAT growth, which grew 7.6% YoY to INR1.4b (est. of INR 1.5b). As per press release, net profit after tax increased 50%, excluding the impact of phasing out of fiscal benefits. 9MFY16 highlights: Sales grew 3.7%, EBITDA 19.7% and adj. PAT 6.4%. Toothpaste volumes were up 2% in 9MFY16. Management discussion highlights: a) As per Nielsen, Toothpaste market grew ~2% during CY15, with rural growth now equal to urban growth. b) CLGT lowered ad spends in response to a cut in ASP by competitors in traditional media (A&P split is close to its historic benchmark of 70:30). Retain Neutral: We reduce our estimates 3-4% to bake in 3Q16 volume miss and higher tax rates. Sluggish market growth and heightened competition (especially from Patanjali) dilute near-term volume growth visibility and highlight risks to earnings. Maintain Neutral with a revised target price of INR980 (34x FY18E EPS). Gautam Duggad (Gautam.Duggad@MotilalOswal.com); +91 22 3982 5404 Manish Poddar (manish.poddar@motilaloswal.com); +91 22 3027 8029/ Vishal Punmiya (Vishal.Punmiya@motilaloswal.com) Investors are advised to refer through important disclosures made at the last page of the Research Report. Motilal Oswal research is available on www.motilaloswal.com/institutional-equities, Bloomberg, Thomson Reuters, Factset and S&P Capital.
Key Quarterly Charts Exhibit 1: Toothpaste volumes grew 1%, multi-year low 15 11 14 12 13 13 14 15 15 Toothpaste Volume Growth (%) 14 11 11 11 11 11 9 8 7 5 7 5 5 2 3 1 3QFY10 4QFY10 1QFY11 2QFY11 3QFY11 4QFY11 1QFY12 2QFY12 3QFY12 4QFY12 1QFY13 2QFY13 3QFY13 4QFY13 1QFY14 2QFY14 3QFY14 4QFY14 1QFY15 2QFY15 3QFY15 4QFY15 1QFY16 2QFY16 3QFY16 Exhibit 2: Toothpaste market share up 60bps YoY, but down 30bps QoQ Toothpaste Market Share (%) Exhibit 3: Toothbrush market share up 140bps YoY Toothbrush Market Share (%) Jan-Jun'12 Jan-Sept'12 Jan-Dec'12 Jan-April'13 Jan-Jun'13 Jan-Sep'13 Jan-Dec'13 Jan-Apr'14 Jan-Jun'14 Jan-Sept'14 Jan-Dec'14 Jan-Apr'15 Jan-Jun'15 Jan-Sept'15 Jan-Dec'15 Jan-Jun'12 Jan-Sept'12 Jan-Dec'12 Jan-April'13 Jan-Jun'13 Jan-Sep'13 Jan-Dec'13 Jan-Apr'14 Jan-Jun'14 Jan-Sept'14 Jan-Dec'14 Jan-Apr'15 Jan-Jun'15 Jan-Sept'15 Jan-Dec'15 54.5 54.6 54.5 55.4 55.9 56.0 56.0 57.1 57.0 56.7 56.7 57.8 57.9 57.6 57.3 38.7 39.3 39.8 41.3 41.2 41.4 41.5 42.3 42.6 42.6 42.4 42.1 42.7 43.3 43.8 Exhibit 4: Gross margin expanded 120bps YoY.. Gross Margin (%) Exhibit 5: Ad spends down 230bps YoY due to lower spend by competitors in traditional media Ad Spend (%) Staff cost (%) Other expenses (%) 62.5 60.2 60.8 61.0 61.5 60.9 60.4 59.1 61.2 61.3 61.8 59.8 61.2 60.5 62.7 62.7 63.5 63.7 63.5 64.1 64.7 22 8 17 21 20 19 21 23 17 17 18 17 17 19 17 16 18 18 19 7 6 6 5 6 7 7 6 8 7 8 6 6 7 7 8 18 21 20 18 19 20 18 8 11 11 13 15 20 16 16 10 3QFY11 4QFY11 1QFY12 2QFY12 3QFY12 4QFY12 1QFY13 2QFY13 3QFY13 4QFY13 1QFY14 2QFY14 3QFY14 4QFY14 1QFY15 2QFY15 3QFY15 4QFY15 1QFY16 2QFY16 3QFY16 3QFY12 4QFY12 1QFY13 2QFY13 3QFY13 4QFY13 1QFY14 2QFY14 3QFY14 4QFY14 1QFY15 2QFY15 3QFY15 4QFY15 1QFY16 2QFY16 3QFY16 27 January 2016 2
Exhibit 6: EBITDA margins expanded 330bps led by lower ad spends and other expenses 21.3 24.2 21.5 22.2 19.1 20.3 19.2 EBITDA Margin (%) 21.8 20.2 18.6 19.5 24.1 20.0 24.5 22.8 16.2 16.9 3QFY12 4QFY12 1QFY13 2QFY13 3QFY13 4QFY13 1QFY14 2QFY14 3QFY14 4QFY14 1QFY15 2QFY15 3QFY15 4QFY15 1QFY16 2QFY16 3QFY16 Exhibit 7: Urban Dentifrice Penetration at 92% Exhibit 8: while rural penetration stood at 74% 75 78 79 80 Urban 87 84 90 91 91 92 38 42 43 46 Rural 56 49 61 63 73 74 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 Exhibit 9: Per capita consumption (in gms) has declined in 2014 for India and China India China Philipines USA Brazil 2013 147 280 374 547 599 2014 136 264 259 543 617 Valuation and view We revise our estimates to bake in 3Q16 miss and expect volumes to recover gradually given market slowdown and heightened competition (Dabur and Patanjali). Maintain Neutral with a revised target price of INR980 (34x FY18 EPS). Key risks: a) Prolonged periods of deflationary environment which can rob the consumer companies of pricing power. b) Deep pocket players like Patanjali/HUL may engage in price war/irrational competition to gain market shares. Exhibit 10: Revised estimates by 3-4% to bake in 3Q16 volume miss and higher tax rates Old New Change (%) FY16E FY17E FY18E FY16E FY17E FY18E FY16E FY17E FY18E Sales 41,913 47,087 54,382 40,913 45,534 52,111 (2.4) (3.3) (4.2) EBITDA 9,574 11,182 12,543 9,709 10,872 12,043 1.4 (2.8) (4.0) EPS 6,153 7,203 8,131 5,989 6,845 7,808 (2.7) (5.0) (4.0) 27 January 2016 3
Exhibit 11: CLGT P/E (x) PE (x) Peak(x) Avg(x) Min(x) 50.0 44.7 40.0 36.2 30.0 28.6 20.0 14.3 10.0 Jan-06 Apr-07 Jul-08 Oct-09 Jan-11 Apr-12 Jul-13 Oct-14 Jan-16 Source: Bloomberg, Company, MOSL Exhibit 12: Colgate P/E premium vs. Sensex 210 Colgate PE Relative to Sensex PE (%) LPA (%) 140 74.6 127.6 70 0-70 Jan-06 Apr-07 Jul-08 Oct-09 Jan-11 Apr-12 Jul-13 Oct-14 Jan-16 Source: Bloomberg, Company, MOSL Exhibit 13: Valuation Matrix of coverage universe Company Reco Price Mkt Cap EPS Growth YoY (%) P/E (x) EV/EBITDA (x) ROE (%) Div. (%) (INR) (USD M) FY15 FY16E FY17E FY15 FY16E FY17E FY15 FY16E FY17E FY15 FY15 Consumer Asian Paints Neutral 859 12,103 15.8 27.0 15.1 57.9 45.6 39.6 39.4 31.2 26.6 32.4 0.8 Britannia Buy 2,649 4,650 45.1 51.1 18.9 55.3 36.6 30.8 39.9 25.4 20.7 56.4 0.6 Colgate Neutral 855 3,417 13.9 7.1 14.3 41.6 38.8 34.0 27.7 23.8 21.1 81.6 1.5 Dabur* Neutral 237 6,118 15.7 16.7 15.8 39.1 33.5 28.9 31.3 26.5 22.5 35.5 0.9 Emami* Buy 994 3,315 20.7 15.4 23.6 46.5 40.2 32.6 41.6 32.8 27.2 44.9 0.7 Godrej Consumer Neutral 1,148 5,738 22.0 24.5 20.0 43.0 34.6 28.8 29.9 25.0 20.7 21.4 0.6 GSK Consumer Buy 5,653 3,493-13.5 19.4 15.5 40.7 34.1 29.5 27.6 24.2 20.5 29.7 0.8 Hind. Unilever Neutral 768 24,407 6.4 5.0 10.9 43.9 41.8 37.7 31.4 28.7 26.3 108.1 2.0 ITC Neutral 313 36,806 8.5 2.7 10.4 26.1 25.4 23.0 17.4 16.6 15.1 33.7 2.0 Jyothy Labs Buy 289 769 48.7 18.9-3.3 41.1 34.6 35.8 34.9 28.3 23.1 16.8 1.4 Marico* Neutral 214 4,053 18.1 17.6 19.9 48.1 40.9 34.1 32.1 27.3 22.6 36.0 0.6 Nestle Neutral 5,485 7,771 6.8-21.8 25.7 42.1 53.9 42.9 25.0 31.3 25.4 48.2 1.1 Page Industries Buy 12,196 1,999 27.5 21.2 27.9 69.4 57.3 44.8 43.1 34.9 28.2 50.7 0.6 Pidilite Inds. Buy 563 4,240 13.2 40.0 13.9 56.2 40.1 35.2 35.4 25.0 21.4 24.3 0.5 Radico Khaitan Buy 113 221 4.2-3.6 31.6 17.1 17.7 13.5 12.2 11.7 9.6 10.5 0.7 United Spirits Buy 2,592 5,534 Loss -1988.6 75.3-1659.5 87.9 50.1 62.0 40.9 29.5-1.2 0.0 Retail Jubilant Foodworks Buy 1,245 1,200-6.2 4.5 53.2 73.5 70.3 45.9 31.5 28.0 19.8 17.2 0.2 Shopper's Stop Neutral 376 454 7.9 25.7 38.6 77.0 61.2 44.2 17.2 15.0 12.9 5.3 0.2 Titan Company Neutral 349 4,552 11.1-6.1 19.5 37.6 40.1 33.5 26.7 29.4 24.6 26.6 0.8 Note: For Nestle FY15 means CY14 27 January 2016 4
Story in charts Exhibit 14: Sales to post 9.6% CAGR over FY15-18E Exhibit 15: Gross margin to expand 60bps over FY15-18E Sales (INR b) Sales growth (%) Gross Margin (%) 13.2% 18.2% 17.5% 14.9% 11.6% 40.9 11.3% 14.4% 60.7 60.0 59.5 60.4 62.9 64.0 64.3 63.5 22.2 26.2 30.8 35.4 39.5 3.5% 45.5 52.1 Exhibit 16: EBITDA margins to expand 210bps over FY15-18E Exhibit 17: PAT to post 12% CAGR over FY15-18E 23.0 21.7 21.0 EBITDA Margin (%) 23.5 23.7 20.8 22.9 PAT (INR m) PAT growth (%) 13.9% 14.3% 14.1% 10.9% 11.3% 7.1% 18.9 4.0 4.9-0.3% 4.5 5.0-1.2% 5.6 6.0 6.8 7.8 Exhibit 18: ROE (x) Exhibit 19: Dividend payout (%) 113 109 107 90 RoE (%) 82 73 73 72 74 Dividend Payout (%) 73 74 74 70 70 70 61 27 January 2016 5
Financials and Valuation Colgate Income Statement (INR Million) Y/E Mar 2011 2012 2013 2014 2015 2016E 2017E 2018E Net Sales 22,206 26,239 30,841 35,449 39,548 40,913 45,534 52,111 Change (%) 13.2 18.2 17.5 14.9 11.6 3.5 11.3 14.4 EBITDA 5,273 5,872 6,668 6,785 8,290 9,709 10,872 12,043 EBITDA Margin (%) 23.0 21.7 21.0 18.9 20.8 23.5 23.7 22.9 Depreciation 342 393 437 508 750 1,123 1,230 1,320 EBIT 4,931 5,479 6,231 6,278 7,540 8,587 9,642 10,723 Interest 33 30 0 0 0 0 0 0 Other Income 301 434 399 358 264 352 351 431 Extraordinary items 26 0 0 492 0 0 0 0 PBT 5,225 5,883 6,630 7,128 7,804 8,938 9,993 11,154 Tax 1,174 1,419 1,663 1,729 2,214 2,950 3,148 3,346 Tax Rate (%) 22.5 24.1 25.1 24.3 28.4 33.0 31.5 30.0 Min. Int. & Assoc. Share 0 0 0 0 0 0 0 0 Reported PAT 4,052 4,464 4,967 5,399 5,590 5,989 6,845 7,808 Adjusted PAT 4,026 4,464 4,967 4,906 5,590 5,989 6,845 7,808 Change (%) -0.3 10.9 11.3-1.2 13.9 7.1 14.3 14.1 Balance Sheet (INR Million) Y/E Mar 2011 2012 2013 2014 2015 2016E 2017E 2018E Share Capital 272 272 272 272 272 272 272 272 Reserves 3,569 4,082 4,624 5,727 7,431 8,533 9,792 11,227 Net Worth 3,841 4,354 4,896 5,999 7,703 8,805 10,064 11,499 Debt 1 0 0 0 0 0 0 0 Deferred Tax -168-121 -224-178 26-100 -100-100 Total Capital Employed 3,673 4,233 4,671 5,821 7,729 8,705 9,964 11,399 Gross Fixed Assets 5,798 6,132 6,735 9,927 12,829 16,329 17,829 18,829 Less: Acc Depreciation 3,248 3,587 3,929 4,368 5,013 6,135 7,365 8,685 Net Fixed Assets 2,550 2,544 2,807 5,559 7,816 10,193 10,464 10,144 Capital WIP 123 694 1,020 1,415 1,412 1,412 1,412 1,412 Investments 387 471 471 371 371 371 371 371 Current Assets 7,044 7,466 8,546 7,364 7,420 6,541 8,223 10,965 Inventory 1,537 2,177 1,853 2,257 2,522 2,579 2,987 3,437 Debtors 430 873 812 547 696 673 748 857 Cash & Bank 3,956 3,098 4,288 2,870 2,545 1,499 2,552 4,579 Loans & Adv, Others 1,122 1,318 1,593 1,690 1,657 1,791 1,936 2,092 Curr Liabs & Provns 6,432 6,942 8,172 8,889 9,290 9,813 10,506 11,493 Curr. Liabilities 4,739 5,870 7,176 7,937 8,018 8,412 9,022 9,925 Provisions 1,693 1,073 995 952 1,272 1,400 1,484 1,569 Net Current Assets 612 524 374-1,525-1,870-3,271-2,283-528 Total Assets 3,673 4,233 4,671 5,821 7,729 8,705 9,964 11,399 27 January 2016 6
Financials and valuation Colgate Ratios Y/E Mar 2011 2012 2013 2014 2015 2016E 2017E 2018E Basic (INR) EPS 14.8 16.4 18.3 18.0 20.6 22.0 25.2 28.7 Cash EPS 16.1 17.9 19.9 19.9 23.3 26.1 29.7 33.6 Book Value 14.1 16.0 18.0 22.1 28.3 32.4 37.0 42.3 DPS 11.0 12.0 13.5 13.4 12.5 15.4 17.6 20.1 Payout (incl. Div. Tax.) 74.3 73.2 73.6 74.5 60.6 70.0 70.0 70.0 Valuation(x) P/E 57.8 52.1 46.8 47.4 41.6 38.8 34.0 29.8 Cash P/E 53.2 47.9 43.0 43.0 36.7 32.7 28.8 25.5 Price / Book Value 60.6 53.4 47.5 38.8 30.2 26.4 23.1 20.2 EV/Sales 10.3 8.7 7.4 6.5 5.8 5.6 5.0 4.4 EV/EBITDA 43.3 39.0 34.2 33.8 27.7 23.8 21.1 18.9 Dividend Yield (%) 1.3 1.4 1.6 1.6 1.5 1.8 2.1 2.4 Profitability Ratios (%) RoE 113.4 108.9 107.4 90.1 81.6 72.6 72.6 72.4 RoCE 145.0 138.6 140.0 119.7 111.3 104.5 103.3 100.4 Turnover Ratios (%) Asset Turnover (x) 7.0 8.6 9.7 8.8 6.7 5.9 5.6 5.4 Debtors (No. of Days) 7 12 9 5 6 5 5 5 Inventory (No. of Days) 44 52 37 42 43 43 45 44 Creditors (No. of Days) 120 88 94 94 87 90 88 85 Net Debt/Equity (x) -1.0-0.7-0.9-0.5-0.3-0.2-0.3-0.4 Cash Flow Statement (INR Million) Y/E Mar 2011 2012 2013 2014 2015 2016E 2017E 2018E Adjusted EBITDA 5,273 5,872 6,668 6,785 8,290 9,709 10,872 12,043 Non cash opr. exp (inc) 0 0 0 0 0 0 0 0 (Inc)/Dec in Wkg. Cap. 255-770 1,339 480 20 356 64 273 Tax Paid -1,166-1,372-1,766-1,683-2,009-2,950-3,148-3,346 Other operating activities 269 404 399 358 264 352 351 431 CF from Op. Activity 4,631 4,135 6,640 5,941 6,565 7,467 8,139 9,400 (Inc)/Dec in FA & CWIP -514-904 -930-3,587-2,898-3,500-1,500-1,000 Free cash flows 4,117 3,230 5,711 2,354 3,667 3,967 6,639 8,400 (Pur)/Sale of Invt -177-84 0 100 0 0 0 0 Others 0 0 0 0 0 0 0 0 CF from Inv. Activity -691-988 -930-3,487-2,898-3,500-1,500-1,000 Inc/(Dec) in Net Worth 16 15-149 -75-38 1 1 0 Inc / (Dec) in Debt -45-1 0 0 0 0 0 0 Interest Paid 0 0 0 0 0 0 0 0 Divd Paid (incl Tax) & Others -3,431-4,019-4,372-3,797-3,954-5,014-5,587-6,373 CF from Fin. Activity -3,460-4,005-4,521-3,872-3,991-5,013-5,586-6,373 Inc/(Dec) in Cash 480-858 1,190-1,418-325 -1,046 1,053 2,028 Add: Opening Balance 3,476 3,956 3,098 4,288 2,870 2,545 1,499 2,552 Closing Balance 3,956 3,098 4,288 2,870 2,545 1,499 2,552 4,579 27 January 2016 7
Corporate profile Company description Colgate-Palmolive India (CLGT) is the market leader in the toothpaste segment, with a share of ~56.7%. Oral Care is one of the most under-penetrated segments of the FMCG market, with ~83% of sales from toothpastes. CLGT has presence in toothbrushes and mouthwash, and Personal Care products like body wash. Exhibit 1: Sensex rebased Source: MOSL/Bloomberg Exhibit 2: Shareholding pattern (%) Sep-15 Jun-15 Sep-14 Promoter 51.0 51.0 51.0 DII 5.9 5.1 7.9 FII 17.6 20.7 18.6 Others 25.4 23.2 22.6 Note: FII Includes depository receipts Source: Capitaline Exhibit 4: Top management Name M V Deoras Vinod Nambiar P K Ghosh R A Shah I Bachaalani Godfrey Nthunzi N Ghate Designation Chairman Chairman Deputy Chairman Vice Chairman Managing Director Whole Time Director & CFO Whole-time Director & CS Exhibit 3: Top holders Holder Name % Holding Arisaig Partners (Asia) Pte Ltd A/c Arisaig India Fund Ltd 3.5 LIC of India 3.1 Virtus Emerging Markets Opportunities Fund 1.2 NA 0.0 NA 0.0 Source: Capitaline Exhibit 5: Directors Name Name Indu Shahani J K Setna V S Mehta Shyamala Gopinath Source: Capitaline *Independent Exhibit 6: Auditors Name Price Waterhouse Type Statutory Source: Capitaline Exhibit 7: MOSL forecast v/s consensus EPS MOSL Consensus (INR) forecast forecast Variation (%) FY16 22.0 22.7-2.9 FY17 25.2 27.0-6.6 FY18 28.7 30.3-5.3 Source: Bloomberg 27 January 2016 8
N O T E S 27 January 2016 9
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This research is distributed in Singapore by Motilal Oswal Capital Markets Singapore Pte Limited and it is only directed in Singapore to accredited investors, as defined in the Financial Advisers Regulations and the Securities and Futures Act (Chapter 289), as amended from time to time. In respect of any matter arising from or in connection with the research you could contact the following representatives of Motilal Oswal Capital Markets Singapore Pte Limited: Kadambari Balachandran Email : kadambari.balachandran@motilaloswal.com Contact : (+65) 68189233 / 65249115 Office Address : 21 (Suite 31),16 Collyer Quay,Singapore 04931 Motilal Oswal Securities Ltd Motilal Oswal Tower, Level 9, Sayani Road, Prabhadevi, Mumbai 400 025 Phone: +91 22 3982 5500 E-mail: reports@motilaloswal.com 27 January 2016 10