Colgate-Palmolive. Q1FY18 Result Update Volume pressure continues; Soft A&P aids Margin. Sector: FMCG CMP: ` 1,083. Recommendation: HOLD

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Colgate-Palmolive Q1FY18 Result Update Volume pressure continues; Soft A&P aids Margin Sector: FMCG CMP: ` 1,083 Recommendation: HOLD Market Statistics Current stock price (`) 1,083 Shares O/S (cr.) 27.2 Mcap (`cr) 29,464 52W H/L (`) 1,139 6m avg. volume 458,640 Bloomberg Shareholding pattern CLGT in Promoters 51.00 Domestic Institution 10.22 Foreign Institution 15.97 Non-institution 22.81 of which more than 1% Life Insurance Corporation of India 5.54 Arisaig Partners (Asia) Pte Ltd A/c Arisaig India Fund Ltd 3.38 Colgate vs Nifty 125 116 107 98 Colgate Capital efficiency & valuations Nifty 89 Aug-16 Dec-16 Apr-17 Aug-17 Particulars FY17 FY18E FY19E RoE (%) 44.9 41.4 42.1 RoCE (%) 74.1 68.5 67.0 P/B (x) 18.7 20.9 18.8 EV/OCF (x) 36.2 36.1 33.0 EV/EBITDA (x) 24.9 29.8 27.2 P/E (x) 41.7 50.4 44.6 Associate Ritu Chaudhary +91-2242245183 ritu.chaudhary@trustgroup.co.in Colgate, based on IND AS, reported negative sales growth of 3.5% to `9.78bn lower than our expectation `10.1bn as volumes declined 5% YoY affected by GST transition. Volume market share in toothpaste declined 160bps YoY to 54.3% while in toothbrush segment market share declined 180bps YoY to 45%. Gross Margin expanded by 108bps to 63.4%. Employee expenses as a percentage of sales increased 14bps YoY to `727mn while A&P and other expenses declined. A&P expenses declined 8% YoY to `1.4b (-70bps YoY) and other expenses declined 4.4% YoY to `1.8b (- 18bps YoY). Resultant, EBITDA grew 5% YoY to `2.2b showing improvement of 183bps YoY in margins to 22.7%. Colgate reduced prices by 8-9% in key categories of toothpaste and brush to pass on GST benefit to consumer. Other income grew 24% YoY while depreciation increased 18% YoY. ETR declined 3pp to 30.8% resulting 8.5% growth in PAT in Q1FY18. APAT (adjusting to exceptional item and other comprehensive income) increased by 8.3% to `1.35bn. GST and stiff competition taking toll on volume growth: Colgate s sales declined 3.5% YoY led by 5% volume decline which was affected by de-stocking ahead of GST implementation and stiff competition by domestic brand. Although company was well prepared for the GST implementation and the transition is successful, Q1FY18 was affected. We expect the cut in MRP of key categories of toothpaste and toothbrush will help increasing the volume growth in retail trade over next few quarters. However 5% decline in volumes is still disappointing and resembles that pressure in volumes is combination higher competitive intensity & continuation of trade channel woes. It also portrays that there is the structural slowdown in volumes and way behind in comparison of historic double digit volumes. Colgate forayed into Ayurveda segment with significant discount (15-20%) to Patanjali Dantkanti but still it has not regained the volumes. Market share has declined by 80bps on QoQ basis in toothpaste while in toothbrush segment it has declined sharply by 240bps. We expect volume growth to gradually pick up in ensuing quarters on account of favorable base and support of new launches. But it would largely at 6-8% volume growth. Colgate continues focuses launching new products (launched entry level Star toothbrush with tongue cleaner and Slim Soft Advanced toothbrush in 2017) and on improving the distribution by reaching to 5.8mn touch points in FY17 and aims to increase it 10-15% every year. EBITDA margins increased 183bps to 22.7% but on lower base: Gross Margin increased by 108bps to 63.4% in Q1Y18 due to 2.2% price hike. Other cost saving initiatives in A&P and other expenses led to sharp 183bps YoY expansion in EBITDA margins to 22.7%. Urban recovery to support premium segment: Colgate continues to remain focused 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 from 15.9% in FY12 to 19% in 2017. As most of the new launches are in the mid-to-premium 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 weak low single digit growth over last 6 quarters. Considering the dynamics, we believe Colgate s historical high double digit growth would be difficult to achieve in the medium term. We expect 9-10% sales growth over FY17-19E on account of new launches, pickup in category growth and low base. We expect Colgate would be able to maintain high EBITDA Margin of ~22-23% over FY17-19. Colgate trades at a high P/E of 50.4x & 44.6x of FY18 & FY19 EPS and captures most of the medium term triggers. Hence, we maintain HOLD rating on the stock.

Quarterly Performance Particulars (`mn) Q1FY17 Q4FY17 Q1FY18 YoY change (%) Gross Sales 11,415 11,718 11,099-2.8% Other Operating Income 75.5 49.4 86.8 15.0% Net Sales(excluding Excise Duty) 10,131 10,375 9,781-3.5% Total RM 3,822.1 3,877.3 3,583.9-6.2% Gross Profit 6,309 6,498 6,197-1.8% Gross Profit Margin % 62.3% 62.6% 63.4% 108bps Employee Expenses 739 763 727-1.6% % of net sales 7.3% 7.4% 7.4% 14bps A&P 1,556 1,443 1,434-7.9% % of net sales 15.4% 13.9% 14.7% -70bps Other Expenses 1,901 1,849 1,818-4.4% % of net sales 18.8% 17.8% 18.6% -18bps EBITDA 2,113 2,443 2,218 5.0% EBITDA Margin % 20.9% 23.5% 22.7% 183bps EBIT 1,897 2,182 1,970 3.8% EBIT Margin % 18.7% 21.0% 20.1% 141bps PBT 1,897 2,182 1,970 3.8% Total tax 640 756 606-5.3% Effective tax % 33.7% 34.7% 30.8% -297bps Reported PAT 1,257 1,426 1,364 8.5% Adjusted PAT 1,252 1,403 1,356 8.3% Source: Company, Trust Exhibit 1: Volume Market Share Trend Market Share Dec'14 Apr'15 Jun'15 Sep'15 Dec'15 Mar-16 Jun-16 Sep-16 Dec-16 Mar'17 Jun'17 Toothpaste 56.7% 57.8% 57.9% 57.6% 57.3% 55.3% 55.9% 55.7% 55.4% 55.10% 54.30% Toothbrush 42.4% 42.1% 42.7% 43.3% 43.8% 45.8% 46.8% 46.6% 47.0% 47.4% 45.0% 2

Financials Income Statement Y/E Mar (`mn) FY15 FY16 FY17 FY18E FY19E Net Revenues 39,819 38,682 39,818 42,870 47,878 % Growth 11.3 (2.9) 2.9 7.7 11.7 Raw Material 14,677 14,763 14,763 16,702 18,926 Staff 2,589 2,624 2,885 3,066 3,425 Other Expenses 14,331 11,912 12,722 13,424 15,014 Total Expenditures 31,598 29,298 30,370 33,192 37,364 EBITDA 8,222 9,384 9,449 9,677 10,514 % Growth 23.9 14.1 0.7 2.4 8.6 EBITDA Margins (%) 20.6 24.3 23.7 22.6 22.0 Other Income 332 396 398 605 858 Interest - - - - - Depreciation 750 1,114 1,332 1,485 1,579 Profit Before Tax 7,803 8,352 8,514 8,797 9,793 Provision for tax 2,214 2,541 2,740 2,903 3,134 Effective tax rate (%) 28.4 30.4 32.2 33.0 32.0 Reported PAT 5,589 5,799 5,723 5,840 6,599 % Growth 3.6 3.8 (1.3) 2.0 13.0 Adjusted Net Profit 5,589 6,017 5,723 5,840 6,599 % Growth 13.7 7.7 (4.9) 2.0 13.0 Balance Sheet Y/E Mar (`mn) FY15 FY16 FY17 FY18E FY19E Equity Share Capital 136 272 272 272 272 Reserves & surplus 7,567 10,038 12,466 13,846 15,405 Shareholders' funds 7,703 10,311 12,738 14,118 15,677 Minorities interests - - - - - Total Debt 15 17 17 17 17 Capital Employed 7,719 10,327 12,755 14,135 15,694 Net fixed assets 9,228 10,865 12,747 12,229 11,751 Cash & Cash Eq. 2,545 2,887 2,943 5,359 7,682 Net Other current assets (4,399) (3,866) (3,207) (3,826) (4,261) Investments 371 541 546 646 796 Net Deferred tax Assets (26) (97) (275) (275) (275) Total Assets 7,718 10,330 12,755 14,134 15,693 3

Cash Flow Statement Y/E Mar (` mn) FY15 FY16 FY17 FY18E FY19E PBT before EO items 7,803 8,666 8,514 8,797 9,793 Add : Depreciation 954 1,185 1,511 1,485 1,579 Less : Direct taxes paid 2,214 2,541 2,740 2,903 3,134 (Inc)/Dec in WC (29) 533 660 (619) (435) Extraordinary - (325) (52) (54) (61) CF from Op after extra 6,572 6,452 6,573 7,945 8,613 (Incr)/Decr in FA 3,004 2,752 3,214 968 1,100 (Pur)/Sale of Investments - 170 5 100 150 CF from Invest. (3,004) (2,922) (3,219) (1,068) (1,250) Inc/(Dec) in equity (50) 6 (99) (0) 0 Less : Dividend paid 3,835 3,198 3,196 4,460 5,040 CF from fin. activity (3,877) (3,191) (3,295) (4,460) (5,040) Incr/Decr of Cash (308) 340 59 2,417 2,323 Add: Opening Balance 2,853 2,544 2,884 2,943 5,359 Closing Balance 2,544 2,884 2,943 5,359 7,682 Key Ratios Y/E Mar FY15 FY16 FY17 FY18E FY19E Raw Material Cost/Sales (%) 36.9 38.2 37.1 39.0 39.5 Manpower Cost/Sales (%) 6.5 6.8 7.2 7.2 7.2 Operating & Other Cost/Sales (%) 36.0 30.8 31.9 31.3 31.4 Revenue Growth (%) 11.3 (2.9) 2.9 7.7 11.7 EBITDA Margins (%) 20.6 24.3 23.7 22.6 22.0 Net Income Margins (%) 14.0 15.6 14.4 13.6 13.8 ROCE (%) 106.5 90.9 74.1 68.5 67.0 ROE (%) 72.6 58.4 44.9 41.4 42.1 Valuation Parameters Y/E Mar FY15 FY16 FY17 FY18E FY19E EPS (`.) 20.5 22.1 21.0 21.5 24.3 P/E (x) 45.0 38.0 41.7 50.4 44.6 BV (`) 28.3 37.9 46.8 51.9 57.6 P/BV (x) 32.7 22.2 18.7 20.9 18.8 EV/EBITDA (x) 30.2 24.0 24.9 29.8 27.2 Fixed assets turnover ratio (x) 4.3 3.6 3.1 3.5 4.1 Net Debt/Equity (x) (0.3) (0.3) (0.2) (0.4) (0.5) EV/Sales (x) 6.2 5.8 5.9 6.7 6.0 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 Sales Trading & Dealing Rajesh Ashar Sales Trader rajesh.ashar@trustgroup.in +91-22-4224-5123 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 Tushar Chaudhari Analyst Commodities, Auto & Mid-caps tushar.chaudhari@trustgroup.in +91-22-4224-5119 Ritu Chaudhary Associate FMCG &Consumer Durable ritu.chaudhary@trustgroup.in +91-22-4224-5183 5

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