Colgate-Palmolive (India) - Operating margins disappoint - Centrum

Colgate posted Q1FY14 revenues in line with expectations at Rs8446mn with 14.7%YoY growth on the back of 11%YoY volume growth in the toothpaste category and 9% overall, coupled with market share gain across categories. Toothpaste market share increased by 120bps YoY to 55.9%. Operating profit was up by mere 5.5% YoY (10.7% below expectations) on the back of increase in A&P and other expenditure. Adj PAT was up by 10.5% YoY to Rs1297mn. We maintain Hold rating as we believe margins could be under pressure due to high A&P spends as the company defends its market share on the back of increasing competition.

Robust revenues but margins under pressure: Colgate posted robust 14.7% sales growth on the back of strong 9% YoY overall volume growth and 11% volume growth in the toothpaste category. Revenue was at Rs8446mn (up 14.7% YoY and 4.1% QoQ) in line with expectations. Operating profit was at Rs1502mn up by 5.5%YoY (10.7% below expectations) as operating margin contracted by 157bps due to higher advertising and other expenditure. The company posted exceptional item of Rs706.4mn (Rs555mn net of taxes) following the sale of GSSO Division to the parent company. Adj. PAT was at Rs1297mn, (up 10.5% YoY) 2.2% below expectations as adj. tax rate for the company was low at 24%.

Double digit volume growth in toothpaste category: The company posted 9% overall volume growth led by the toothpaste category which grew by 11%. Even after regular price hikes and stiff competition, the company has been able to maintain its double digit volume growth in the toothpaste category. Flagship brands such as 'Colgate Dental Cream', 'Active Salt', 'Max Fresh', and 'Colgate Total' contributed to this growth. Market share in the toothpaste category continues to increase and was at 55.9% in Jan-Jun '13 against 54.7% in Jan-Jun '12 on the back of premiumisation of products. Market share in the toothbrush category also increased to 41.4% against 38.7% as the company has been aggressive with multiple launches. We believe the company has been facing pressure in the mouthwash category due to the economic slowdown.

Operating margins continue to remain muted: Operating profit for the company grew by mere 5.5% YoY and was 10.7% below expectations at Rs1502mn as operating margins declined by 157bps to 17.8%. Advertising expenses during the quarter was up by 21.1% YoY on the back of high competitive intensity. Other expenditure too increased by 37% YoY on the back of high promotional intensity and hike in fuel & power costs. Employee cost was up by 9.5%YoY but down 10.9% sequentially as the company sold the GSSO division. Gross margin for the company was up by 185bps due to benign commodity prices and prudent price hikes.

Other highlights: The company sold its 'Global Shared Services Organization' division by way of slump sale to Colgate Global Services Pvt Ltd w.e.f June 1, 2013 for Rs599mn. Adjusting for relevant assets and liabilities, exceptional revenue of Rs706.4mn (Rs555mn net of capital gains tax) has been booked.

Estimates lowered; Maintain Hold: We are marginally reducing our Ebidta and PAT estimates on the back of higher A&P spends and an increase in other expenditure. Colgate is currently trading at 33.6x and 28.9x FY14E and FY15E EPS of Rs41.9 and Rs48.7 respectively. We maintain our Hold view on the stock and roll forward our multiple to FY15 from Sept 2014 and arrive at a target price of Rs1,460 (30x FY15).

Source : Equity Bulls

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