Buy Colgate Palmolive - Motilal Oswal

• Mkt Cap USD2.5b
• CMP Rs844
• Buy

Net sales grew 13% YoY to Rs5.3b, with toothpaste volumes growing 14%. The results are not comparable to those of the previous year due to the impact of the merger of subsidiaries. Reported gross margins expanded 660bp to 62.8% due to lower input costs and the impact of merger of subsidiaries. EBITDA margins expanded 380bp to 29.1%. Adjusted PAT grew 18.6% to Rs1.2b; PAT growth was lower due to a 450bp increase in the tax rate to 22.3% (v/s our estimate of 23%).

- Toothpaste volume growth 14%; rural initiatives help Colgate: Net sales grew 13% YoY as Colgate rode the oral care opportunity. Toothpaste volumes grew 14% YoY and Colgate's overall volumes grew 13%. We estimate a 2% positive impact due to a price increase, 1% negative impact due to higher excise and ~1% negative impact due to mix deterioration. Colgate raised prices of select brands by 3-4% over the past 2-3 months.

- Gross margins up 660bp; higher other expenses cap EBITDA expansion: Gross margin expanded 660bp YoY due to low input costs and the impact of the merger of subsidiaries. Gross margin expansion is a positive surprise considering the increased excise burden (~2%) and mix deterioration (faster growth in Cibaca). Ad-spend increased 70bp to 13.1% (15.3% in FY10) and other expenses increased 200bp to 14.5%. EBITDA margins expanded 380bp to 29.1% and EBITDA grew 30% to Rs1.6b.

- Valuation and view: We believe Colgate is the best play on oral care in India. We are revising estimates to factor in an improved margin profile. Our EBITDA margin assumption is now 25.5% (24.6% earlier) for FY11 and 25.9% for FY12 (24.8% earlier). Our EPS estimates have been upgraded by 4% for FY11 to Rs33.5 (Rs32.3 earlier) and by 5% for FY12 to Rs40 (Rs38.1 earlier). The stock trades at 25.2x FY11E EPS and 21.1x FY12E EPS. Maintain Buy.

Source : Equity Bulls

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