Q3FY13 Result Update
Colgate-Palmolive (India)
Neutral
Target Price: Rs1,407
CMP: Rs1,362
Upside: 3%
Margins disappoint
Colgate-Palmolive posted 13.9% revenue growth in Q3FY13 on the back of 9% volume growth. Operating margins were under pressure with 238bps decline on the back of high employee cost and other expenditure. Higher tax rate muted PAT with a drop of 3.9% YoY. Premium valuations offer limited upside and hence we maintain Neutral view on the stock.
m Disappointing Q3FY13 results: Colgate posted 13.9% sales growth on the back of mere 9% YoY volume growth with revenue at Rs7626mn (up 13.9% YoY but down 1.4% QoQ). With margin compression due to lower volume growth, coupled with high other expenses, operating profit was at Rs1288mn (down 0.2% YoY and 18% QoQ). PAT was down by 3.9% YoY to Rs1111mn on the back of higher tax rate.
m Volume growth low, but market share gain continues: The company posted mere 9% volume growth led by the toothpaste category which had 10% volume growth. On the back of regular price hikes volume growth came under pressure. Market share in the toothpaste category continues to increase and was at 54.2%, up from 52.4% last year. Premiumisation of products coupled with new launches is helping the company gain market share in the toothpaste category. In the mouth wash category the recent launch has helped the company enhance sales and market share was at 26.7%. The market share in the toothbrush category was at 39.5% on the back of focussed efforts and new launches.
m Operating margin dips: Operating margin of the company contracted by 238bps YoY and 341bps on a sequential basis to 16.9%. Gross margins dipped by mere 31bps on the back of prudent price hikes on a regular basis. Advertising spends were under check on the back of lower competition and was at 13% of sales. Employee cost was up by 18.2% YoY while other expenditure was up by 45% YoY on the back of the new plant.
m Estimates lowered; Maintain Neutral: We have lowered our FY13/FY14 estimates by 4.1%/3.5% factoring in lower volume growth and high operating cost, both impacting margins. The stock is currently trading at 35.7x FY13E and 30.9x FY14E which is ~15% above its historical average. However at such premium valuations we believe the stock is fairly valued. Hence we maintain Neutral rating with a target price of Rs1,407 (30x Sept 2014E).
