Sell Colgate; target of Rs 974: KRChoksey

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Sell Colgate; target of Rs 974: KRChoksey

KRChoksey is bearish on Colgate Palmolive (India) and has recommended sell rating on the stock with a target of Rs 974 in its January 24, 2012 research report.

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KRChoksey is bearish on Colgate Palmolive (India) and has recommended sell rating on the stock with a target of Rs 974 in its January 24, 2012 research report.

"Colgate Palmolive (India), net sales improve significantly by 20% y-o-y to Rs 669.6 crores (above estimates) driven by strong volume growth of 15% y-o-y and ~5% price hike in Toothpaste category. EBITDA grew by 73% y-o-y to Rs 129 crores on the back of significant decline in ASP expenses & employee cost, partially offset by higher raw material cost. Consequently margins improved by 591 bps y-o-y to 19.3% for the quarter. Net profit grew by 75% y-o-y & 16.4% q-o-q to Rs 116 crores on the back of 8.2% y-o-y increase in other income and significant decline in effective tax rate (22% in Q3FY12 v/s 27% in Q3FY11)."

"CPIL reported strong topline growth of 20% y-o-y to Rs 669.6 crores on account of robust volume growth of 15% in the toothpaste category and price hike of ~5%. Volume growth in key brands like Colgate Sensitive Pro, "Colgate Dental Cream", "Active Salt", "Max Fresh" & "Colgate Total" toothpaste were the main drivers for the topline growth. Company maintained its leadership position with a market share of 52.5% (Dec10-Nov11). Mouthwash category continues to do well with volume market share of 27.4%. CPIL exhibited strong operational performance with EBITDA improving significantly by 73% y-o-y to Rs 129 crores. Key reason being the 555 bps y-o-y decline in adspends as a % to sales (from 21.6% in Q3FY11 to 16.1% in Q3FY12).Realignment of adspends was also to mitigate the rising raw material cost pressure (Menthol, packaging material). Consequently GPM declined by 90 bps y-o-y but OPM improved by 591 bps y-o-y to 19.3%. We expect margins to remain in the range of 20-21% over FY12-13E. Net profit increased by 75% y-o-y to Rs 116 crores on the back of higher other income & significant decline in effective tax rate (down by 551 bps y-o-y).We expect the tax rate to be ~26% for FY12E & FY13E."

"Despite strong volume growth in the toothpaste segment we expect the CPIL profitability to remain under pressure on account of increased competitive intensity (HUL, Dabur & possible entry of P&G), reduced pricing power & higher tax rate. We have revised our estimates & expect CPIL to register earnings CAGR of 14.7% over FY11- 13E. Thus we recommend a "SELL" on the stock with a target price of Rs 974 (25x FY13E EPS of Rs 39)," says KRChoksey research report.       

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To read the full report click on the attachment