Edelweiss Research is also available on www.edelresearch.com, Bloomberg EDEL <GO>, Thomson First Call, Reuters and Factset. Edelweiss Securities Limited We recently met Ms. Prabha Parameswaran, Managing Director, Colgate‐ Palmolive India (Colgate). She reiterated that there is no slowdown in growth, except for some impact in the mouthwash segment. Management expects sales growth momentum (16% CAGR over FY08‐13) to remain robust riding rise in both penetration (rural stands at only 63% against 91% in urban) and per capita consumption (India half of China; pushing “brushing twice”). We believe the company is well equipped to counter competition from P&G’s impending entry in the toothpaste market. However, we expect ad spends in the toothpaste category to accelerate (will aid broadcasters like ZEE, Sun TV). Maintain ‘HOLD’. Premiumisation, penetration, consumption: Growth mantra Colgate will focus on increasing rural penetration and per capita consumption. Premiumisation will aid gross margin (globally, Colgate’s margins are 5‐7% higher than in India). Premium segment now contributes 10% to sales versus negligible earlier. Our view: Well equipped to tackle fresh competition In our view, P&G’s impending entry seems ill‐timed. Since the entry has been anticipated for years, existing players are well prepared—Colgate, HUL and Dabur have stepped up aggression in distribution, innovation and promotion; GSK is well entrenched in the premium segment. It will thus be a difficult and expensive affair for P&G. The toothpaste market, in our view, is the toughest nut in the Indian consumer space to crack as it is strongly dominated by Colgate, armed with an increasing and highest‐ever market share. Also, as P&G sharpens focus on the toothpaste category, its focus on shampoos, skin cream and detergents is likely to wane, benefiting HUL, Dabur etc. Thus, we expect P&G’s entry to be gradual and selective. Outlook and valuations: Robust; maintain ‘HOLD’ We continue to like Colgate’s strong distribution, generic brand, customer activations and innovation. Currently, the stock is trading at 31.8x and 27.4x FY14E and FY15E EPS, respectively. We maintain ‘HOLD’ and rate the stock ‘Sector Performer’. VISIT NOTE COLGATE PALMOLIVE Fore warned is fore armed EDELWEISS 4D RATINGS Absolute Rating HOLD Rating Relative to Sector Performer Risk Rating Relative to Sector Medium Sector Relative to Market Overweight MARKET DATA (R: COLG.BO, B: CLGT IN) CMP : INR 1,288 Target Price : INR 1,411 52‐week range (INR) : 1,580 / 1,097 Share in issue (mn) : 136.0 M cap (INR bn/USD mn) : 182/ 3,107 Avg. Daily Vol.BSE/NSE(‘000) : 108.3 SHARE HOLDING PATTERN (%) Current Q3FY13 Q2FY13 Promoters * 51.0 51.0 51.0 MF's, FI's & BK’s 5.2 5.4 6.0 FII's 21.6 21.6 20.9 Others 22.2 22.1 22.1 * Promoters pledged shares (% of share in issue) : NIL PRICE PERFORMANCE (%) Stock Nifty EW Consumer Goods Index 1 month (9.6) (5.9) 9.2 3 months 0.3 1.3 16.8 12 months 21.2 14.1 40.8 Abneesh Roy +91 22 6620 3141 [email protected]Pooja Lath +91 22 6620 3075 [email protected]India Equity Research| Consumer Goods June 24, 2013 Financials Year to March FY12 FY13 FY14E FY15E Revenues (INR mn) 26,932 31,638 36,860 43,168 Rev. growth (%) 17.8 17.5 16.5 17.1 EBITDA (INR mn) 5,785 6,568 7,444 8,751 Net profit (INR mn) 4,465 4,968 5,511 6,395 Shares outstanding (mn) 136 136 136 136 Diluted EPS (INR) 32.8 36.5 40.5 47.0 EPS growth (%) 10.9 11.3 10.9 16.0 Diluted P/E (x) 39.2 35.3 31.8 27.4 EV/EBITDA (x) 29.7 26.1 22.9 19.4 ROAE (%) 109.0 109.9 109.7 111.1
Transcript
Edelweiss Research is also available on www.edelresearch.com, Bloomberg EDEL <GO>, Thomson First Call, Reuters and Factset. Edelweiss Securities Limited
We recently met Ms. Prabha Parameswaran, Managing Director, Colgate‐Palmolive India (Colgate). She reiterated that there is no slowdown in growth, except for some impact in the mouthwash segment. Management expects sales growth momentum (16% CAGR over FY08‐13) to remain robust riding rise in both penetration (rural stands at only 63% against 91% in urban) and per capita consumption (India half of China; pushing “brushing twice”). We believe the company is well equipped to counter competition from P&G’s impending entry in the toothpaste market. However, we expect ad spends in the toothpaste category to accelerate (will aid broadcasters like ZEE, Sun TV). Maintain ‘HOLD’.
Premiumisation, penetration, consumption: Growth mantra Colgate will focus on increasing rural penetration and per capita consumption. Premiumisation will aid gross margin (globally, Colgate’s margins are 5‐7% higher than in India). Premium segment now contributes 10% to sales versus negligible earlier.
Our view: Well equipped to tackle fresh competition In our view, P&G’s impending entry seems ill‐timed. Since the entry has been anticipated for years, existing players are well prepared—Colgate, HUL and Dabur have stepped up aggression in distribution, innovation and promotion; GSK is well entrenched in the premium segment. It will thus be a difficult and expensive affair for P&G. The toothpaste market, in our view, is the toughest nut in the Indian consumer space to crack as it is strongly dominated by Colgate, armed with an increasing and highest‐ever market share. Also, as P&G sharpens focus on the toothpaste category, its focus on shampoos, skin cream and detergents is likely to wane, benefiting HUL, Dabur etc. Thus, we expect P&G’s entry to be gradual and selective.
Outlook and valuations: Robust; maintain ‘HOLD’ We continue to like Colgate’s strong distribution, generic brand, customer activations and innovation. Currently, the stock is trading at 31.8x and 27.4x FY14E and FY15E EPS, respectively. We maintain ‘HOLD’ and rate the stock ‘Sector Performer’.
VISIT NOTE
COLGATE PALMOLIVEFore warned is fore armed
EDELWEISS 4D RATINGS
Absolute Rating HOLD
Rating Relative to Sector Performer
Risk Rating Relative to Sector Medium
Sector Relative to Market Overweight
MARKET DATA (R: COLG.BO, B: CLGT IN)
CMP : INR 1,288
Target Price : INR 1,411
52‐week range (INR) : 1,580 / 1,097
Share in issue (mn) : 136.0
M cap (INR bn/USD mn) : 182/ 3,107
Avg. Daily Vol.BSE/NSE(‘000) : 108.3
SHARE HOLDING PATTERN (%)
Current Q3FY13 Q2FY13
Promoters *
51.0 51.0 51.0
MF's, FI's & BK’s 5.2 5.4 6.0
FII's 21.6 21.6 20.9
Others 22.2 22.1 22.1 * Promoters pledged shares (% of share in issue)
Meeting with Ms. Prabha Parameswaran | Key takeaways No slowdown in the toothpaste category: Despite some top‐end personal care categories facing slowdown, demand for Colgate continues to be robust in toothpaste. However, mouthwash growth has slackened (currently growing at 10‐12% YoY as against 25‐30% two years back). Premiumisation: The discretionary slowdown has also failed to impact premiumisation as higher disposable incomes in hands of consumers is leading to up‐trading to higher price packs, brands. Over the past two years, premiumisation growth has been dramatic, which is evident from the premium segment now contributing ~ 10% to sales versus negligible a few years ago. Globally, Colgate Total as percentage of sales is equivalent to contribution from Colgate Dental Cream in India; Brazil’s toothpaste market 10 years ago is where the Indian toothpaste market currently stands. This provides ample evidence of likely consumer up‐trading as the economy evolves. Gross margin is likely to expand as product mix improves (globally Colgate’s gross margins are 5‐7% higher than in India, due to higher sales from Colgate Total, sensitive and other premium products). Growth opportunity: Colgate has posted 16% CAGR over FY08‐13 and is confident of growing strongly in the coming years. Growth opportunity stems from: (i) toothpaste category’s rural penetration at 63% (up from 42% in 2006) against 91% in urban areas; and (ii) India’s per capita consumption being lowest in the world (at 137g). Rural opportunity remains bright: Good monsoons, higher support prices for crops and NREGA scheme will ensure higher disposable incomes coupled with adequate product availability (due to enhanced rural reach) which will help boost rural penetration. Strategy to increase consumption: India’s per capita consumption (PCC) is at 137g/year, half of that in China (277g) and one‐fifth of US and Brazil. If the consumption reaches even that of China, the toothpaste market will double. PCC has grown from 125g three years ago to the current primarily due to new users (converted significant number of non‐users and infrequent users to frequent users) and not so much due to habitual change (brushing twice) which provides huge headroom for growth. Colgate is working towards this goal by promoting night brushing which needs bringing about a change in the socio‐cultural behaviour. Government support in many other countries like Brazil, Sri Lanka plays a key role in imbibing “brushing twice” as a habit through school programmes. In India, the company has a drive “Bright Smiles Bright Futures”, which involves free dental check‐ups and teaching oral hygiene in schools; Colgate has touched ~100mn children through this drive till now. Market share: In the toothpaste category, Colgate’s volume market share increased to 55.4% in Q4FY13 (up 130bps YoY). The next two competitors have a market share of 23.5% and 13.2%, respectively. Toothbrush volume market share increased sharply to 41.5% in Q4FY13 (up 380bps YoY). The next two competitors have a market share of 19.0% and 7.8%, respectively. Colgate’s volume market share in the mouthwash category stood at 26.5% in Q4FY13 (up 30bps YoY).
Mouthwash: The category is in infancy and is bound to grow rapidly in larger cities in the coming years. Colgate is encouraging category growth with regular promotions in smaller SKU (60ml priced at INR40) to induce repeat purchase due to eventual habit formation. We believe uni‐dosage is a growth opportunity in the mouthwash space which will help rapid category expansion. New launches: Colgate launched whitening toothpaste Colgate Visible White offering whiter teeth (improvement by one shade) in just one week; priced at INR79 for 100g and INR40 for 50g. Colgate has roped in Sonam Kapoor as the brand ambassador for this product. Portfolio gap with parent: The company has brought in several products from the global portfolio to India, the latest being Colgate Visible White. It will continue this depending on the development of the Indian toothpaste market and probability of acceptance by the Indian consumer. Colgate’s Indian portfolio will thus never be complete due to the dynamic nature of the market where lifestyle changes provide opportunity for newer solutions (new toothpaste offerings) to be introduced. Handwash segment: Colgate remains open to the handwash category (which is a stronghold in many other markets) when the category evolves from the current positioning of markets on anti‐bacterial products to more premium and differentiated offerings like moisturizing and fragrance oriented products gaining centre‐stage (which is the company’s forte). R&D centre: Colgate has an Indian R&D centre dedicated to local research which reports to the global research centre. This helps address local needs with global technological support. Active salt and toothpowder were designed specifically to cater to the Indian cultural needs. Though localisation focused innovation is of prime importance currently, as people’s exposure to global environment increases, replicating the global portfolio will become more relevant. Pricing strategy: Colgate uses analytics to measure price sensitivity and accordingly takes pricing action to ensure minimum impact on volume growth. For instance, pricing action is less aggressive in categories like the INR5 price point and the 50g pack where users are price sensitive. Raw material also plays a vital role in determining pricing action. Sensitive toothpaste category: Rising awareness among consumers has rendered the sensitive toothpaste category a highly attractive segment to operate in. The segment has been growing at a higher clip (over a low base) and also at the cost of toothpastes positioned as herbal and medical. Currently, ~17% of population is a potential customer of this category; hence, it is likely to be significantly large category of the total toothpaste market in the next three to five years. Competition in the category has helped expand size which is likely to help Colgate. Mouthwash: The INR1bn category has been growing at a strong 30% YoY. However, being a discretionary product, some slowdown is likely in the near term. Colgate’s main competitors across the globe include Johnson & Johnson, GSK and P&G. Tax rate: Tax rate is expected to inch up 150bps each for FY14E and FY15E as the Baddi manufacturing facility moves out of tax exemption.
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Existing competition: In Q4FY13, Colgate’s strongest competitor in the toothpaste category, Hindustan Unilever (HUL), posted double digit growth (largely volume led) in its oral care portfolio. Also, the third largest player in the category, Dabur’s oral care portfolio grew 12.3% YoY. GSK Consumer launched new toothpaste from its global portfolio, Parodontax, in the gum care segment priced at INR100 for 80g; and a new variant of Sensodyne – Repair & Protect that repairs teeth enamel damaged due to sensitivity. Competition in the sensitive category: As per Nielsen, GSK Consumer (Sensodyne) has overtaken Colgate (Sensitive) in the sensitivity toothpaste segment with a market share of 26% against Colgate’s 25%. Figures are for March. We believe the market share gain by GSK is primarily due to stronger distribution of GSK Pharma in the chemist channel. Sensitive toothpaste market is 5% of toothpaste market, but has been growing at a fast rate due to premiumisation. The company aims to expand its pharmacy network to increase Sensitive sales. Colgate continues to be a mass focused brand. P&G’s impending entry in toothpaste: P&G has announced that it will soon be entering the Indian toothpaste market under the Oral‐B brand. Globally, Colgate has been able to maintain market share in most markets when P&G entered. Also Colgate with products spanning the entire price ladder is well poised to counter competition. In other markets like Mexico and Brazil, P&G had pitched Oral B against Colgate Total. However, Colgate will have to increase ad spends to maintain competitive intensity. We believe P&G’s entry is a logical step since it is already doing well in the toothbrush category, though the company has been late to enter the market. Past two years performance has been below expectation (in terms of profitability); the Indian toothpaste market is a tough nut to crack as it is strongly dominated by Colgate, which has sustained its leadership for decades owing to its robust distribution network, strong brand equity, over 75 years of presence in the category (which has made it a generic brand) and high level of consumer awareness programmes through continuous on ground events. Since P&G’s entry has been expected for a long time, competitors are well prepared for the onslaught; Colgate, HUL and Dabur have been aggressive on distribution, innovation (Colgate Whitening, Dabur’s Babool with salt; HUL’s Germ Protection) and promotion (“Fly to HongKong for a magical Disney Experience” in Pepsodent by HUL). It will thus be a difficult and expensive affair for P&G to gain a large market share in the Indian toothpaste market. We do expect ad and promotional expenses to step up with the heightened competitive intensity. It can potentially aid volumes for Colgate as increased noise in the space will help market growth, benefiting the leader the most (is always ahead of the curve with innovative and timely launches). Also, as P&G increases focus on the toothpaste category, its focus on shampoos, skin cream and detergents could likely reduce, benefiting HUL, Dabur etc. Thus, we expect P&G’s entry to be gradual and selective.
Status in other countries Through various innovative techniques and a strong distribution network, Colgate has been able to improve its global market share in both toothpaste and toothbrush categories over the past decade.
P&G is aggressively increasing visibility of Oral‐B brand
Colgate Palmolive
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With the entry of new players, the company has more or less retained market share while new players have gained market share from the No. 2 player. Currently, Colgate is well placed across the globe with over three times the market share of its nearest competitor. Brazil and China: In Brazil, Colgate has maintained its leadership and has managed to gain market share at the expense of the No. 2 player. Its leadership continues in China, whereas competitors have lost market share. The company continued its toothpaste leadership in Greater Asia, driven by market share gains in India, China, Thailand, the Philippines, Singapore and Vietnam. Successful new products including Colgate Optic White, Colgate Total Pro Gum Health, Darlie Enamel and Darlie Expert White toothpastes contributed to volume growth throughout the region. US: Unlike other US consumer companies, Colgate was strong in international markets and weak in the US, until it decided to focus on core oral care portfolio and take leading competitors (P&G and Unilever) head on in 1994. The company closed plants, reorganised supply chain, implemented SAP software and invested in neglected brands, including Colgate Toothpaste. In a stagnant US toothpaste market, Colgate's share climbed from 21.3% in 1994 to 26.2% in 1997 according to A.C. Nielsen. During the same period, P&G's market share fell from 31.6% to 25.3%.
Outlook and valuations: Fairly valued; maintain ‘HOLD’ We continue to like Colgate’s focus on activations, innovation, distribution expansion and building brand equity. We have cut our EPS marginally for FY14E and FY15E 1.9% and 1.4%, respectively (to INR40.5 and INR47.0) due to step up in ad costs due to entry by P&G. However, we believe P&G’s entry will lead to market expansion. We value Colgate at P/E of 30x FY15E (at a slight discount to HUL valued at 32x FY15E) arriving at a target price of INR1,411. We maintain ‘HOLD’ and rate the stock ‘Sector Performer’ on relative return basis.
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Chart 1: Per capita consumption of toothpaste low in India
Chart 2: Comparison of rural vs urban penetration of toothpaste in India
Chart 3: Overall volume growth (%)
Source: Company, Edelweiss research
100
220
340
460
580
700
Brazil USA Philippines China India
(Gms/year)
20.0
35.8
51.6
67.4
83.2
99.0
2005 2006 2007 2008 2009 2010 2011 2012
(%)
Rural Urban
2.0
5.2
8.4
11.6
14.8
18.0
FY08 FY09 FY10 FY11 FY12 FY13
(%)
Colgate Palmolive
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Chart 4: Toothpaste volume growth (%)
Chart 5: Gross margin comparison with peers
Source: Company, Edelweiss research
Fig. 1: Colgate—Global leader in toothpaste and toothbrush categories
Colgate earns one of the highest margins in the Consumer space owing to its dominance in the category and strong brand equity. Margins could come under pressure as pricing power moderates due to P&G's foray into the Indian toothpaste space.
Consumer Goods
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Fig. 2: Colgate—Domestic leader in toothpaste and toothbrush categories
Source: Company
Colgate Palmolive
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Company Description Colgate is India’s biggest oral care products company with more than 95% of its sales coming from this product category. The company has products across variants and price points in toothpaste, toothpowder, and toothbrushes, and is the leader in each of these categories.
Investment Theme Colgate is market leader in oral care category with ~55.4% market share in toothpaste category and enjoys strong brand equity, built over the years through high investment on creating consumer awareness and brand recall. Volume growth would also remain robust riding rise in both penetration and per capita consumption. Also, new categories like sensitive toothpaste and mouthwash will further enhance growth and premiumisation. However, higher competition will induce Colgate to increase its brand spends, which could cap its margins.
Key Risks New entrants like P&G could hit the company hard. Further risks arise from down trading by consumers due to the delayed monsoon, gloomy macroeconomic environment and rising food inflation. Deficient rainfall could impact agricultural activity, which in turn could hit rural demand. Sharp rise in input prices or continued depreciation of the INR could increase cost of imported chemicals.
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Financial Statements
Income statement (INR mn)
Year to March FY12 FY13 FY14E FY15E
Net revenue 26,239 30,841 35,961 42,074
Other Operating Income 694 797 899 1,094
Total operating income 26,932 31,638 36,860 43,168
Oppenheimerfunds Incorporated 5.64 Arisaig Partners Asia Pte Ltd 3.53
Life Insurance Corp Ltd 3.53 Virtus Emerging Markets 1.24
Harris Trust & Savings Bank 1.24 Wasatch Advisors Inc 1.15
Vontobel Asset Management AG 0.80 Columbia Wanger Asset Management 0.75
Eastspring Investments Singapore 0.66 Vanguard Group Inc 0.53
*as per last available data
Insider Trades Reporting Data Acquired / Seller B/S Qty Traded No Data Available
*in last one year
Bulk Deals Data Acquired / Seller B/S Qty Traded Price No Data Available
*in last one year
Additional Data
Directors Data Mukul Deoras Chairman Mr. R. A. Shah Vice Chairman P.K. Ghosh Deputy Chairman Prabha Parameswaran Managing Director Paul Alton Whole‐time Finance Director Niket Ghate Whole‐time Director, Company SecretaryVikram Singh Mehta Executive Director J.K. Setna Non‐executive Director Indu Shahani Non‐executive Director
Buy appreciate more than 15% over a 12‐month period
Hold appreciate up to 15% over a 12‐month period
Reduce depreciate more than 5% over a 12‐month period
Rating Expected to
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Colgate Palmolive
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