Neutral on Colgate Palmolive - Motilal Oswal

COLGATE 3QFY11: Below est; Toothpaste volume up 13%; PAT down 37% due to high costs; Cutting est 13-18%; Neutral

Net sales grew 13.8% to Rs5.6b (est Rs5.7b) on back of toothpaste volume growth of 13% (est 13.5%). Overall volumes grew 12%

Gross margin expanded 290bp to 60.1%, not comparable YoY due to merger of erstwhile subsidiaries (contract manufacturers).

Ad-spend grew 60.2% to Rs1.2b and expanded 630bp to 21.6% (as a % to sales). Staff cost increased 28.8% (110bp).

EBITDA margin, consequently contracted 760bp to 16.1% (est 25.5%). EBITDA de-grew 23% YoY to Rs931m

Adj PAT de-growth was aggravated due to higher tax rate (27.4% in 3QFY11 vs 13.6% in 3QFY10) resulting in Adj PAT decline of 37% to Rs663m (est Rs1.1b).

We estimate 13% PAT CAGR over FY11-13E. On revised estimates the stock trades at 25.7x FY12E and 22.2x FY13E. We believe sustained margin pressure and lower growth rates can de-rate the stock in the coming quarters. Maintain Neutral with a target price of Rs742 (20x FY13E EPS).

Source : Equity Bulls

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