Reduce Colgate; target of Rs 826: Emkay

“Colgate Palmolive (India), volume growth of 14% in toothpastes, which is in line with our expectations, had led to a 15.6% growth in sales to Rs 6.1 bn. However, higher-than-expected A&P spends (16.2% in 1QFY12 vs. 13.1% in 1QFY11) and increase in other expenditure (16.1% vs. 15% in 1QFY11), resulted in a 700 bps decline in EBITDA margins to 19.2%, against our expectation of 24.5%. APAT declined by 17.7% to Rs 1 bn, which is below our expectation of Rs 1.2 bn.”

“The core portfolio, toothpastes , continues to report healthy volume growth of 14% driven by not only its flagship brands -Colgate Dental Cream, MaxFresh, Active Salt, but also the recently launched Colgate Sensitive Pro-Relief toothpaste. Volume market shares in toothpaste remained constant at 53% (June-May 2011). Overall volume growth of 12% is indicative of a continued weakness in the toothbrush portfolio, driven by a 30 bps decline in market shares to 40% (June- May2011). We believe increased A&P spends during the quarter were driven by new product launches in the premium portfolio including Colgate Sensitive Pro-Relief. Further, new launches like Colgate Plax sensitive mouthwash, Colgate Sensitive Pro-Relief toothbrush and Colgate Plax complete care mouthwash and higher competitive activities are likely to keep A&P spends higher. We have forecasted 80 bps increase in A&P spends to 16.5% for FY12E.”

“While we expect Colgate to benefit from increasing penetration and rising per capita consumption of dentifrice products, we believe valuations at 26.4x FY13E EPS capture this growth momentum but does not leave any room for downside risks. Moreover, current valuations appear expensive as 1) It being a single product com pany is trading at 26.4x one-year forward vs. its historical average of 21.3x, 2) Earnings CAGR of 13% is lower than industry average of 19% over FY11-13E and 3) No upgrade catalyst visible. Hence, we downgrade the stock to REDUCE (from HOLD) with an unchanged target price of Rs 826 per share. Nevertheless, any corporate action would remain a key risk to our recommendation,” says Emkay Global Financial Services research report. 

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