4QFY2010 Result Update I FMCG May 27, 2010 Colgate-Palmolive Performance Highlights ACCUMULATE CMP Target Price Rs715 Rs752 We highlight the fact that the current quarter results are not comparable yoy/qoq, due to the amalgamation of Professional Oral Care Products Pvt Ltd (POC), Goa, effective from April 1, 2009, which was reflected entirely during the current quarter. Colgate posted a modest Top-line growth of 13.4% yoy, in-line with our estimates. Colgate s Earnings registered a strong growth of 39.6% yoy, significantly ahead of our expectations of a 19.7% growth, aided by significant Margin expansion (largely Gross Margin) and a dip in the Tax rate to 9.1%. We have marginally tweaked our estimates on the Operating front to account for the higher Gross Margins. However, we have reduced our Earnings estimates by 1-2% to account for the higher Tax rate (as tax benefits from Baddi are set to reduce from 100% to 30% from FY2011E). We maintain an Accumulate on the stock. Earnings grow ~50% yoy, beat estimates by 28%: Colgate posted a modest Top-line growth of 13.4% yoy to Rs517cr. The growth was led by a robust 11% overall volume growth, supported by 11% yoy volume growth in its core Toothpaste category. On the Operating front, the company delivered a sharp Margin expansion of 638bp yoy to 24.1%, driving a healthy growth in EBITDA of 54.1% yoy to Rs124.7cr. Margins expanded largely on account of a sharp jump in Gross Margins (up 1,415bp yoy). However, a significant rise in Other expenditure (up 745bp yoy, 73% yoy in absolute terms), coupled with a rise in advertising expenditure (up 72bp yoy), curtailed further Margin expansion. Earnings registered a strong growth of 39.6% yoy to Rs114.4cr, despite a 224.4% yoy increase in the Depreciation to Rs20.6cr (Rs6.4cr), aided by significant Margin expansion (largely Gross Margin) and a 535bp yoy dip in the Tax rate to 9.1%. Outlook and Valuation: During FY2010E-12E, we expect Colgate to report a CAGR of 15.1% in its Top-line, backed by an overall volume growth of 10-11% and value growth of 3-4%. On the Operating front, we expect the Margins to remain stable, as the company is likely to re-invest its gains from a benign input cost environment into higher advertising spends to combat the potential heightened competitive intensity in the Oral care market. At the CMP of Rs715, the stock is trading at 19.3x FY2012E EPS of Rs37.1 (at a 5% discount to its historical Earnings). Hence, we maintain an Accumulate on the stock, with a Target Price of Rs752. Investment Period 12 Months Stock Info Sector FMCG Market Cap (Rs cr) 9,720 Beta 0.4 52 WK High / Low 772/447 Avg. Daily Volume 45,993 Face Value (Rs) 1 BSE Sensex 16,666 Nifty 5,003 Reuters Code COLG.BO Bloomberg Code CLGT @IN Shareholding Pattern (%) Promoters 51.0 MF/Banks/Indian FIs 11.5 FII/NRIs/OCBs 15.8 Indian Public 21.7 Abs. (%) 3m 1yr 3yr Sensex 1.4 18.1 16.2 Colgate 3.4 55.4 91.5 Key Financials Y/E Mar (Rs cr) FY2009 FY2010E FY2011E FY2012E Net Sales 1,695 1,962 2,268 2,599 % chg 15.0 15.8 15.6 14.6 Net Profit (Adj) 290.2 423.3 442.5 504.2 % chg 25.3 45.8 4.5 13.9 OPM (%) 16.3 21.7 21.9 22.1 EPS (Rs) 21.3 31.1 32.5 37.1 P/E (x) 33.5 23.0 22.0 19.3 P/BV (x) 44.9 29.8 23.5 18.1 RoE (%) 134.2 129.8 106.9 94.0 RoCE (%) 124.2 124.1 116.6 103.9 EV/Sales (x) 5.6 4.8 4.1 3.5 EV/EBITDA (x) 34.4 22.0 18.6 15.7 Source: Company, Angel Research Anand Shah Tel: 022 4040 3800 Ext: 334 E-mail: anand.shah@angeltrade.com Chitrangda Kapur Tel: 022 4040 3800 Ext: 323 E-mail: chitrangdar.kapur@angeltrade.com Please refer to important disclosures at the end of this report Sebi Registration No: INB 010996539 1
Exhibit 1: Quarterly Performance Update Y/E March (Rs cr) 4QFY10 4QFY09 % chg FY2010 FY2009 % chg Net Sales 516.6 455.5 13.4 1,962.5 1,694.8 15.8 Consumption of RM 154.3 200.5 (23.0) 776.8 741.3 4.8 (% of Sales) 29.9 44.0 39.6 43.7 Staff Cost 42.1 38.9 8.2 159.1 138.5 14.8 (% of Sales) 8.1 8.5 8.1 8.2 Advertising 83.4 70.2 18.7 299.4 271.7 10.2 (% of Sales) 16.1 15.4 15.3 16.0 Other Expenses 112.1 64.9 72.7 301.4 267.7 12.6 (% of Sales) 21.7 14.3 15.4 15.8 Total Expenditure 391.9 374.6 4.6 1,536.7 1,419.3 8.3 Operating Profit 124.7 80.9 54.1 425.7 275.5 54.5 OPM (%) 24.1 17.8 21.7 16.3 Interest 0.4 0.1 263.6 1.5 1.1 36.4 Depreciation/Amortisation 20.6 6.4 224.4 37.6 23.0 63.7 Other Income 22.2 20.5 8.0 98.1 98.7 (0.6) PBT (excl Ext. Items) 125.9 95.0 32.5 484.8 350.2 38.4 Ext Income/(Expenses) - (4.9) - (4.9) PBT (incl Ext. Items) 125.9 90.1 39.7 484.8 345.3 40.4 (% of Sales) 24.4 19.8 24.7 20.4 Prov. for Taxation 11.5 13.1 (11.9) 61.5 55.1 11.7 (% of PBT) 9.1 14.5 12.7 16.0 Recurring PAT 114.4 77.1 48.4 423.3 290.2 45.8 PATM (%) 22.1 16.9 21.6 17.1 Reported PAT 13.6 13.6 13.6 13.6 Equity Shares (cr) 8.4 5.7 31.1 21.3 45.8 EPS (Rs) 114.4 81.9 39.6 423.3 295.1 43.4 Source: Company, Angel Research We highlight the fact that the current quarter results are not comparable yoy/qoq, due to the amalgamation of Professional Oral Care Products Pvt Ltd (POC), Goa, effective from April 1, 2009. The same has been reflected entirely in the numbers of the current quarter in: 1) higher depreciation charges, 2) a significant reduction in the purchase of traded goods, leading to strong Gross Margin expansion, and 3) a lower Tax rate. Top-line growth in-line with estimates; Volume growth steady at 11% Colgate posted a modest Top-line growth of 13.4% yoy to Rs516.6cr (Rs455.5cr), inline with our estimates. The growth was led by a robust 11% overall volume growth, supported by 11% yoy volume growth in its core Toothpaste category. The company has increased its leadership position by 170bp yoy to a 53.4% (51.7%) volume market share during the January March, 2010. The flagship brands, Colgate Dental Cream, Active Salt and Cibaca, continued to contribute to the consistent volume growth. The Toothbrush category witnessed a robust growth this quarter, increasing its volume market share by 340bp yoy to 41.2% (37.8%), while the volume market share of the Toothpowder category registered a marginal decline by 90bp to 48.3% (49.2%). May 27, 2010 2
Recurring Earnings growth strong at 40%, beat estimates by 17% Colgate s Earnings for the quarter on a recurring basis registered a strong growth of 39.6% yoy to Rs114.4cr (Rs81.9cr), significantly ahead of our expectations of a 19.7% growth to Rs98cr. The higher-than-anticipated growth in the Bottom-line, despite a 224.4% yoy increase in the Depreciation to Rs20.6cr (Rs6.4cr), was aided by significant Margin expansion (largely Gross Margin) and a 535bp yoy dip in the Tax rate to 9.1%. On a reported basis, Colgate reported a 48.4% yoy growth in Earnings to Rs114.4cr (Rs77.1cr), as 4QFY2009 had an extraordinary charge of Rs4.9cr on account of VRS. OPM expands 638bp, driven by sharp Gross Margin expansion On the Operating front, the company delivered a sharp Margin expansion of 638bp yoy to 24.1% (17.8%), significantly ahead of our estimates of 19.8% Operating Margins, driving a healthy growth in EBITDA of 54.1% yoy to Rs124.7cr (Rs80.9cr). Margins expanded largely on account of a sharp jump in Gross Margins (up 1,415bp yoy), due to a 36% yoy decline in the Purchase of traded goods to Rs52cr (Rs81cr). Moreover, on the input cost front (excluding purchase of traded goods), the company registered a 645bp yoy Gross Margin expansion, indicating a highly benign input cost environment. However, a significant rise in Other expenditure (up 745bp yoy, 73% yoy in absolute terms), coupled with a rise in advertising expenditure (up 72bp yoy), curtailed further Margin expansion. Outlook and Valuation We are positively surprised with the strong Earnings growth posted by Colgate during the quarter, albeit aided by a significant decrease in the Purchase of traded goods and lower Tax Provisioning (on account of the amalgamation of the Goa subsidiary). Hence, we have marginally revised our estimates on the Operating front to account for higher Gross Margins. However, we have reduced our Earnings estimates by 1-2% to account for the higher Tax rate (as tax benefits from Baddi are set to reduce from 100% to 30% from FY2011E). Exhibit 2: Revision in Estimates Old Estimate New Estimate % chg (Rs cr) FY10E FY11E FY10E FY11E FY10E FY11E Revenue 2,268 2,599 2,268 2,599 - - OPM (%) 20.2 20.3 21.9 22.1 170bp 178bp EPS 33.1 37.6 32.5 37.1 (1.7) (1.3) During FY2010-12E, we expect Colgate India to report a CAGR of 15.1% in its Topline, backed by an overall volume growth of 10-11% and value growth of 3-4% (driven by price hikes and improvement in the product-mix), new product launches and heavy investment in building brand equity. On the Operating front, we expect the Margins to remain stable, as the company is likely to re-invest its gains from a benign input cost environment into higher advertising spends to combat the potential heightened competitive intensity in the Oral care market. At the CMP of Rs715, the stock is trading at 19.3x FY2012E EPS of Rs37.1 (a 5% discount to its historical Earnings). Hence, we maintain an Accumulate on the stock, with a Target Price of Rs752. Downside risks to our estimates include: 1) Increase in the competitive intensity, and 2) a Sharp rise in raw material costs. May 27, 2010 3
Exhibit 3: 1-year forward P/E band 900 800 14x 17x 20x 23x 700 600 Share Price (Rs) 500 400 300 200 100 - Apr-05 Jun-05 Aug-05 Oct-05 Dec-05 Feb-06 Apr-06 Jun-06 Aug-06 Oct-06 Dec-06 Feb-07 Apr-07 Jun-07 Aug-07 Oct-07 Dec-07 Feb-08 Apr-08 Jun-08 Aug-08 Oct-08 Dec-08 Feb-09 Apr-09 Jun-09 Aug-09 Oct-09 Dec-09 Feb-10 Apr-10 Source: Bloomberg, Angel Research Exhibit 4: 1-year forward P/E Chart 45.0 40.0 35.0 30.0 25.0 20.0 15.0 10.0 5.0 - Apr-02 Aug-02 Dec-02 Apr-03 Aug-03 Dec-03 Apr-04 Aug-04 Dec-04 Apr-05 Aug-05 Dec-05 Apr-06 Aug-06 Dec-06 Apr-07 Aug-07 Dec-07 Apr-08 Aug-08 Dec-08 Apr-09 Aug-09 Dec-09 Apr-10 Source: Bloomberg, Angel Research; Note: Red-line indicates 5-year average Exhibit 5: 1-year forward Premium to Sensex Chart 160% 140% 120% 100% 80% 60% 40% 20% 0% -20% -40% Apr-02 Aug-02 Dec-02 Apr-03 Aug-03 Dec-03 Apr-04 Aug-04 Dec-04 Apr-05 Aug-05 Dec-05 Apr-06 Aug-06 Dec-06 Apr-07 Aug-07 Dec-07 Apr-08 Aug-08 Dec-08 Apr-09 Aug-09 Dec-09 Apr-10 Source: Bloomberg, Angel Research; Note: Red-line indicates 5-year average May 27, 2010 4
Profit & Loss Statement Rs crore Y/E Mar FY2007 FY2008 FY2009 FY2010E FY2011E FY2012E Gross sales 1,385 1,553 1,758 2,039 2,358 2,706 Less: Excise duty 90 80 63 77 91 107 Net Sales 1,295 1,473 1,695 1,962 2,268 2,599 Total operating income 1,295 1,473 1,695 1,962 2,268 2,599 % chg 15.2 13.8 15.0 15.8 15.6 14.6 Total Expenditure 1,086 1,244 1,419 1,537 1,772 2,025 Cost of Materials 576 633 741 777 910 1,045 Advertising Exp 291 357 395 443 508 580 Personnel 112 117 139 159 179 203 Others 2,037 2,320 3,440 2,770 2,959 3,229 EBITDA 209 230 276 426 496 574 % chg 20.2 9.9 20.0 54.5 16.5 15.8 (% of Net Sales) 16.1 15.6 16.3 21.7 21.9 22.1 Depreciation& Amortisation 15 20 23 38 29 31 EBIT 194 210 253 388 467 543 % chg 36.0 8.3 20.4 53.7 20.4 16.3 (% of Net Sales) 14.9 14.2 14.9 19.8 20.6 20.9 Interest & other Charges 1 1 1 2 2 2 Other Income 67 85 99 98 109 122 (% of PBT) 25.8 28.9 28.2 20.2 19.0 18.3 Share in profit of Associates - - - - - - Recurring PBT 260 293 350 485 575 663 % chg 38.2 12.9 19.5 38.4 18.5 15.4 Extraordinary Expense/(Inc.) 58 1 5 - - - PBT (reported) 202 292 345 485 575 663 Tax 41 60 55 62 132 159 (% of PBT) 16.0 20.6 15.7 12.7 23.0 24.0 PAT (reported) 218 233 295 423 443 504 Add: Share of associates - - - - - - Less: Minority interest (MI) - - - - - - PAT after MI (reported) 218 233 295 423 443 504 ADJ. PAT 160 232 290 423 443 504 % chg 16.4 44.7 25.3 45.8 4.5 13.9 (% of Net Sales) 12.4 15.7 17.1 21.6 19.5 19.4 Basic EPS (Rs) 11.8 17.0 21.3 31.1 32.5 37.1 Fully Diluted EPS (Rs) 11.8 17.0 21.3 31.1 32.5 37.1 % chg 16.4 44.7 25.3 45.8 4.5 13.9 May 27, 2010 5
Balance Sheet Rs crore Y/E Mar FY2007 FY2008 FY2009 FY2010E FY2011E FY2012E SOURCES OF FUNDS Equity Share Capital 136 14 14 14 14 14 Preference Capital - - - - - - Reserves& Surplus 145 149 203 312 400 523 Shareholders Funds 281 162 216 326 414 536 Minority Interest - - - - - - Total Loans 4 5 5 5 5 5 Deferred Tax Liability (26) (28) (18) (18) (18) (18) Total Liabilities 259 139 203 313 401 523 APPLICATION OF FUNDS Gross Block 371 409 384 491 515 553 Less: Acc. Depreciation 244 258 251 289 318 349 Net Block 127 151 133 202 198 204 Capital Work-in-Progress 24 8 5 10 15 17 Goodwill 41 41 41 41 41 41 Investments 133 73 38 21 21 21 Current Assets 354 402 542 590 762 968 Cash 112 144 251 348 511 680 Loans & Advances 153 173 197 122 132 153 Other 90 85 94 120 119 134 Current liabilities 421 534 556 552 636 727 Net Current Assets (66) (133) (14) 39 126 240 Mis. Exp. not written off - - - - - - Total Assets 259 139 203 313 401 523 Cash Flow Statement Rs crore Y/E Mar FY2007 FY2008 FY2009 FY2010E FY2011E FY2012E Profit before tax 202 292 345 485 575 663 Depreciation 15 20 23 38 29 31 Change in Working Capital 29 41 25 (30) 60 41 Interest / Dividend (Net) (18) (20) (34) (33) (37) (42) Direct taxes paid 58 60 55 62 132 159 Others (1) (25) (36) 79 11 14 Cash Flow from Operations 169 248 268 477 506 549 Inc./ (Dec.) in Fixed Assets (30) (21) 9 (112) (30) (39) Inc./ (Dec.) in Investments 15 61 34 17 0 0 Cash Flow from Investing (15) 39 43 (95) (30) (39) Issue of Equity 0 (122) 0 0 0 0 Inc./(Dec.) in loans (0) 0 0 (0) 0 0 Dividend Paid (Incl. Tax) 148 153 238 318 350 382 Interest / Dividend (Net) (18) (20) (34) (33) (37) (42) Cash Flow from Financing (130) (255) (204) (286) (313) (340) Inc./(Dec.) in Cash 24 33 107 96 163 170 Opening Cash balances 88 112 144 251 348 511 Closing Cash balances 112 144 251 348 511 680 May 27, 2010 6
Key Ratios Y/E Mar FY2007 FY2008 FY2009 FY2010E FY2011E FY2012E Valuation Ratio (x) P/E (on FDEPS) 60.7 41.9 33.5 23.0 22.0 19.3 P/CEPS 55.4 38.6 31.0 21.1 20.6 18.2 P/BV 34.6 59.9 44.9 29.8 23.5 18.1 Dividend yield (%) 1.3 1.8 2.1 2.8 3.1 3.4 EV/Sales 7.4 6.5 5.6 4.8 4.1 3.5 EV/EBITDA 49.6 45.7 37.5 24.2 19.7 16.6 EV / Total Assets 46.0 41.7 34.4 22.0 18.6 15.7 Per Share Data (Rs) EPS (Basic) 11.8 17.0 21.3 31.1 32.5 37.1 EPS (fully diluted) 11.8 17.0 21.3 31.1 32.5 37.1 Cash EPS 12.9 18.5 23.0 33.9 34.7 39.4 DPS 9.5 13.0 15.0 20.0 22.0 24.0 Book Value 20.6 11.9 15.9 24.0 30.4 39.4 Returns (%) RoCE (Pre-tax) 73.5 105.3 147.5 150.5 131.0 117.6 Angel RoIC (Pre-tax) - - - - - - RoE 58.1 104.7 153.4 156.1 119.6 106.1 Turnover ratios (x) Asset Turnover (Gross Block) 3.5 3.6 4.4 4.0 4.4 4.7 Inventory / Sales (days) 23 19 18 17 17 16 Receivables (days) 3 2 2 2 3 3 Payables (days) 89 86 85 79 78 78 May 27, 2010 7
Research Team Tel: 4040 3800 E-mail: research@angeltrade.com Website: www.angeltrade.com DISCLAIMER This document is solely for the personal information of the recipient, and must not be singularly used as the basis of any investment decision. Nothing in this document should be construed as investment or financial advice. Each recipient of this document should make such investigations as they deem necessary to arrive at an independent evaluation of an investment in the securities of the companies referred to in this document (including the merits and risks involved), and should consult their own advisors to determine the merits and risks of such an investment. Angel Securities Limited, its affiliates, directors, its proprietary trading and investment businesses may, from time to time, make investment decisions that are inconsistent with or contradictory to the recommendations expressed herein. The views contained in this document are those of the analyst, and the company may or may not subscribe to all the views expressed within. Reports based on technical and derivative analysis center on studying charts of a stock's price movement, outstanding positions and trading volume, as opposed to focusing on a company's fundamentals and, as such, may not match with a report on a company's fundamentals. The information in this document has been printed on the basis of publicly available information, internal data and other reliable source believed to be true, and is for general guidance only. Angel Securities Limited has not independently verified all the information contained within this document. Accordingly, we cannot testify, nor make any representation or warranty, express or implied, to the accuracy, contents or data contained within this document. While Angel Securities Limited endeavours to update on a reasonable basis the information discussed in this material, there may be regulatory, compliance, or other reasons that prevent us from doing so. This document is being supplied to you solely for your information, and its contents, information or data may not be reproduced, redistributed or passed on, directly or indirectly. Angel Securities Limited and its affiliates may seek to provide or have engaged in providing corporate finance, investment banking or other advisory services in a merger or specific transaction to the companies referred to in this report, as on the date of this report or in the past. Neither Angel Securities Limited, nor its directors, employees or affiliates shall be liable for any loss or damage that may arise from or in connection with the use of this information. Note: Please refer to the important `Stock Holding Disclosure' report on the Angel website (Research Section). Disclosure of Interest Statement Colgate-Palmolive 1. Analyst ownership of the stock No 2. Angel and its Group companies ownership of the stock No 3. Angel and its Group companies Directors ownership of the stock No 4. Broking relationship with company covered No Note: We have not considered any Exposure below Rs 1 lakh for Angel and its Group companies. Address: Acme Plaza, A Wing, 3rd Floor, M.V. Road, Opp. Sangam Cinema, Andheri (E), Mumbai - 400 059. Tel : (022) 3952 4568 / 4040 3800 Angel Broking Ltd: BSE Sebi Regn No : INB 010996539 / CDSL Regn No: IN - DP - CDSL - 234-2004 / PMS Regn Code: PM/INP000001546 Angel Securities Ltd:BSE: INB010994639/INF010994639 NSE: INB230994635/INF230994635 Membership numbers: BSE 028/NSE:09946 Angel Capital & Debt Market Ltd: INB 231279838 / NSE FNO: INF 231279838 / NSE Member code -12798 Angel Commodities Broking (P) Ltd: MCX Member ID: 12685 / FMC Regn No: MCX / TCM / CORP / 0037 NCDEX : Member ID 00220 / FMC Regn No: NCDEX / TCM / CORP / 0302 May 27, 2010 8