Colgate-Palmolive India - Strong volume growth continues - Centrum

Colgate-Palmolive posted strong 17.7% revenue growth in Q2FY13 on the back of 10% volume growth. Even though gross margins were at 11 quarter low, the company was able to boost operating margins by 194bps on the back of lower advertisement and prudent cost savings. Lower tax rate boosted PAT growth to 34% YoY. Premium valuations offer limited upside and hence we maintain Neutral view on the stock.

- Strong Q2FY13 results: Colgate posted robust 17% sales growth on the back of strong 10% YoY volume growth with revenue at Rs7738mn (up 17.7% YoY and 5.1% QoQ). With margin expansion due to price hikes, operating profit was at Rs1571mn (up 30.2% YoY and 10% QoQ). PAT was up by 17% to Rs1174mn on the back of lower tax rate (due to tax reversal for prior period).

- Double digit volume growth continues: Company posted double digit volume growth of 10% led by the toothpaste category which had 11% volume growth. Even after regular price hikes volume growth continued. Market share in toothpaste category continues to increase and was at 54.4%. Premiumisation of products is helping the company gain market share in the toothpaste category. In the mouth wash category the recent launch of Colgate Plax Fresh Tea continued to enhance sales and market share was at 26.8%. The market share in the toothbrush category was at 39%.

- Operating margin expands: Operating margin of the company expanded by 194bps YoY and 96bps on a sequential basis to 20.3% on the back of price hikes and prudent cost management with admin & other expenses increasing by mere 8% YoY. Advertising spends were under check on the back of lower competition. Gross profit margins were however lowest in last 11 quarters on the back of increase in prices of Sorbitol and peppermint oil. Gross margins contracted by 173bps and were at 58.1%. Employee cost was up by mere 3.8% YoY.

- Maintain Neutral: The stock is currently trading at 32.4x FY13E and 28.2x FY14E which is ~15% above its historical average. Upgrading of customers to premium products and constant product innovations remains the key to the company's double digit volume growth and market share improvement. However at such premium valuations we believe the stock is fairly valued. Hence we maintain Neutral rating with a target price of Rs1,370 (30x FY14E).

Source : Equity Bulls

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