Hold Colgate-Palmolive; target of Rs 1005: Emkay

Colgate Q1FY17revenue was in-line with our estimates, but higher excise duty and A&P mars EBITDA margins. Key highlights 1) Net revenues at Rs 10.1bn, up 8.9% yoy, domestic volume growth at 5% yoy vs estimate of 4% and including exports, volume growth was 6% yoy. 2) EBITDA grew3.6% yoy to Rs 2.0bn, Gross margin up 140bps yoy to 62%, but higher ad spends up 24% yoy (15.5% of sales, up 190bps yoy) and excise duty 293bps yoy stemmed EBITDA margins to 20.3%, -100bps yoy. 3) APAT at Rs 1.3bn, down 14.6% yoy impacted by higher depreciation and tax rate.

We expect better FY17 led by improvement in rural income and increased focus towards product innovation and natural space. High innovation pipeline in FY17 will keep ad spends at elevated levels thus; we have cut our margins marginally leading to 3% earnings cut.  However, expect improving growth and margin trajectory in FY18 and upgrade earnings by 2%. While, there is an improvement in volume profile, but given the continued outperformance (19% returns in last 3 months), we see limited scope for upside from current levels. We revise rating one notch down to Hold with revised price target of Rs 1005 (35x FY18E).  For all recommendations, click here Disclaimer: The views and investment tips expressed by investment experts/broking houses/rating agencies on moneycontrol.com are their own, and not that of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.