Stock Market Update on Colgate for 1QFY2012

Stock Market Update on Colgate for 1QFY2012 with an Reduce recommendation and a Target Price of `869 (12 months)

Colgate reported a weak performance for 1QFY2012. The company’s top line grew by 15.6% yoy, 1.4% above our estimates, driven by volumes. Earnings for the quarter declined by 17.7% yoy, owing to a sharp contraction in OPM and higher tax from the manufacturing plant in Baddi. The company’s operating margin contracted by 709bp yoy on account of spike in ad spends and other expenses. We maintain our Reduce rating on the stock.

Steady growth in oral care: Colgate registered top-line growth of 15.6% yoy, which was completely driven by volumes (registered 12% of overall volumes).
The toothpaste category witnessed steady volume growth of 14% yoy, resulting in the volume market share increasing to 53.0%. All core brands, Colgate dental cream, Active Salt, Max Fresh and Cibaca contributed to the top-line growth. In the toothbrush category, Colgate’s market share increased to 40.0%. Colgate Plax registered strong volume market share growth to 24%. Market shares mentioned are from June 2010–May 2011.

Outlook and valuation: During FY2011–13E, we expect Colgate India to report a 14.9% CAGR in its top line (largely volume growth) and have modeled in a 52bp yoy margin contraction due to higher ad spends and lower operating leverage. However, in terms of earnings, we expect Colgate to register a ~13% CAGR for FY2011-13E (~9% in FY2012E) as we model in higher tax rate (26% in FY2012). Hence, we retain our Reduce rating on the stock with a revised target price of `869 (`874), based on 23x FY2013E EPS.