Colgate Palmolive (India) - 1QFY17 Result Update - Volumes Recover but at a Cost - Reliance Securities

Net sales of Colgate Palmolive (India) grew 8.9% yoy to Rs10.1bn, while EBITDA growth was recorded at 3.6% and PBT (before exceptional items) increased by just 1.7% to Rs1.9bn in the quarter ended June 30, 2016. It reported overall volume growth of 6% with domestic volume growing by 5%. While gross sales growth was higher at 12.5%, net sales grew just 8.9% on account of sharp 49% jump in tax outgo resulting from phasing out of Excise Duties benefits.

Going forward, we estimate the volume growth to pick up pace, especially with the launch of Cibaca Vedshakti in the naturals space at an attractive price point. However, this is likely to keep A&P spends at elevated levels, which would drag earnings growth, in our view. We expect the Company to report 12.7% and 10% CAGR in revenues and earnings through FY16-18E. We reiterate our HOLD recommendation on the stock with revised Target Price of Rs1,055.

Volumes Recovery in Process

Domestic business witnessed 5% volume growth during the quarter. Although, the Company has lost market share on yoy basis, it has recovered some share sequentially. Volume-wise, market share in toothpaste stood at 55.9% in June'16 vs. 55.3% in Mar'16 and 57.9% in 1HCY15. On the other hand, volume market share in Toothbrush was higher both on yoy as well as qoq basis. It stood at 46.8% in June'16 vs. 45.8% in Mar'16 and 42.7% in 1HCY15. The Company stated that new products such as Colgate Sensitive Clove & Colgate A1 Toothbrush led overall growth in the quarter.

Higher A&P Spend Drags EBITDA Margins

Weak demand environment and heightened competitive intensity resulted in 190bps rise in A&P spends to 15.5% of sales. With launch of Cibaca Vedshakti at 30% discount to effectively counter Patanjali Dant Kanti, we expect A&P spends to remain at elevated levels, going forward. Although gross margins were higher by 140bps, higher A&P and staff cost dragged EBITDA margins by 100bps to 20.3% during the quarter.

Outlook & Valuation

We expect Colgate to post revenues of Rs46.4bn & Rs52.4bn and net profit of Rs6.4bn & Rs7.3bn in FY17E & FY18E respectively. Based on expected EPS of Rs27, currently the stock trades at 37.7x FY18E earnings. While we expect volume growth and market shares to recover, higher A&P spends could cap earnings growth in coming quarters. We retain our HOLD rating on the stock with revised Target Price of Rs1,055, based on 38x June'16 earnings, which is a 10% discount to its average one-year forward multiple.

Shares of COLGATE-PALMOLIVE (INDIA) LTD. was last trading in BSE at Rs.956 as compared to the previous close of Rs. 960.95. The total number of shares traded during the day was 21150 in over 918 trades.

The stock hit an intraday high of Rs. 970.5 and intraday low of 951. The net turnover during the day was Rs. 20342655.

Source : Equity Bulls

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