Colgate-Palmolive Surprises on Margin Front - PINC Result Review

Colgate's Q1FY11 numbers were better than our estimates mainly on margin surprises. Net sales growth of 13% was entirely led by volume growth. Gross margin expansion of 645bps was driven by the amalgamation of Professional Oral Care (POC), which contributed 4% to the margins. EBITDA margins improved by 382bps on higher A&P and other expenditure. Net profits growth of 19% has beaten our estimates by 10%.

We believe an all time high EBITDA margin in the June quarter is unlikely to sustain in the subsequent quarters due to anticipated higher A&P and other expenditures. We expect competitive pressure in the toothpaste category to entail higher marketing efforts. However, we slightly revise our EBITDA margin estimates by 70bps and 140bps in FY11E and FY12E respectively on improved gross margin.

VALUATIONS AND RECOMMENDATION

We maintain our target multiple of 23x, slightly higher than the sector, as we believe the growth will sustain on the back of rural focus, regular product launches, continuous dental awareness programme and width & depth of Colgate's product portfolio.

At Sep'11 earnings we derive TP of Rs872. Average dividend yield of ~2.5% will further improve the upside. We maintain 'BUY' recommendation.

Source : Equity Bulls

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