Express Idea Colgate-Palmolive (India) Rating: BUY Strong market share gains in toothpaste segment Target (1‐3 months): Rs1,512 Despite increased competition in the oral care space, Colgate continues to CMP: Rs1,396 dominate the oral care industry with strong ~50% market share. The company Upside: 8.3% has developed significant entry barriers by means of distribution (5mn+ Exit Trigger*: Rs1,320 outlets) and branding efforts. It has successfully driven both penetration and premiumisation in the Indian markets, leading to consistent gross margin Sector: FMCG gains and has witnessed 600bps+ increase in toothpaste market share at Sector view: Positive ~56% since 2008. It has aggressively marketed products like Colgate Sensitive, Sensex: 22,485 Colgate Pro‐Relief and Colgate Total where prices are 2‐5x that of the base 52 Week h/l (Rs): 1,555/1,190 Colgate Dental Cream. Premium products now contribute ~10% to sales Market cap (Rscr) : 18,924 compared to negligible numbers a few years ago. We believe the 6m Avg vol (‘000Nos): 100 premiumisation focus will help Colgate improve margins as these products Bloomberg code: CLGT IB gain scale. BSE code: 500830 Low penetration levels offer opportunity to grow further NSE code: COLPAL Indian oral care industry is highly under‐penetrated especially in the rural FV (Re): 1 markets. Companies are using these low penetration levels as an opportunity Prices as on Apr 15, 2014 to grow the market. The per capita consumption (PCC) level in India is very Company rating grid low at 137gms/year compared to 277gms in China and 561gms in USA. In rural India PCC is ~1/3rd that of urban India. We believe increasing rural Low High penetration, shift in demand from toothpowder to toothpaste and rising 1 2 3 4 5 urban PCC levels will continue to drive volume growth for the toothpaste Earnings Growth category. Being the market leader, Colgate is expected to benefit most Cash Flow (economy brand ‘Cibaca’ has strong presence in the rural markets). B/S Strength Valuation appeal Dominant position in the oral care industry… Recommend BUY Risk With its robust brand equity, innovative launches and products across price‐ points, Colgate continues to dominate the industry. The entry of P&G has not Share price trend affected Colgate in a significant manner so far. We expect Colgate to increase 150 Colgate Sensex its focus on the personal care (Palmolive) and household care (Axion) segments which will further drive growth. The mouthwash category (Colgate 100 Plax) which is nascent is also expected to develop over the longer term and add to profits. We expect Colgate to witness a ~15%/11% revenue/PAT CAGR over FY13‐16, driven by double‐digit volume growth (in low‐teens) and 50 Apr‐13 Aug‐13 Dec‐13 Apr‐14 price/mix gains. Recommend Buy. Financial summary Share holding pattern Y/e 31 Mar (Rs m) FY13 FY14E FY15E FY16E Promoters Institutions Others Revenues 31,638 35,638 41,266 47,645 100 yoy growth (%) 17.5 12.6 15.8 15.5 Operating profit 6,568 6,392 7,814 9,379 OPM (%) 20.8 17.9 18.9 19.7 50 Reported PAT 4,968 4,673 5,594 6,707 yoy growth (%) 11.3 (5.9) 19.7 19.9 0 Mar‐13 Jun‐13 Sep‐13 Dec‐13 EPS (Rs) 36.5 34.4 41.1 49.3 P/E (x) 38.2 40.6 33.9 28.3 Price/Book (x) 38.8 35.8 32.5 28.3 EV/EBITDA (x) 28.3 29.0 23.7 19.6 RoE (%) 107.4 91.6 100.4 107.0 Research Analyst: RoCE (%) 143.4 128.6 143.4 152.8 Vanmala Nagwekar Source: Company, India Infoline Research [email protected] April 16, 2014 * Exit trigger is the price level below which investor should exit position An Express Idea is a recommendation based on our view on the sector and / or stock from a near to medium term perspective, typically less than three months. 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