RESULTS REVIEW 3QFY19 24 JAN 2019 Colgate-Palmolive (India) NEUTRAL HDFC securities Institutional Research is also available on Bloomberg HSLB <GO>& Thomson Reuters Nothing to cheer about Colgate reported an in-line quarter with revenue growth of 6.5% (exp. 8.5%) driven by volume growth of 7% (exp. 6.5%). The co. has increased its trade and consumer promotional intensity resulting in softer revenue growth and gross margin pressure. EBITDA/APAT grew by 11/13% (exp. 10/12%). Natural’s category (~25% mix) is now growing at a slower pace (15% growth vs. 25% earlier). Colgate’s market share pressure is easing (although gradually) owing to (1) Naturals category growing at a slower rate, (2) Pan-India launch of Swarna Vedshakti and (3) Increased promotional intensity. Colgate’s premium portfolio (eg. Colgate Sensitive, Total etc) was earlier declining at a brisk pace, now witnessing slower declines (4% mix vs. 8% 2 years ago). The co. is focusing on driving volume growth via aggressive promotional intensity and re-launch of its flagship product (Colgate dental cream). We sense that the management looks to protect market share in their core brands and at the same time gain share in the ‘naturals’ portfolio with product launches. We expect this strategy to deliver 11% revenue CAGR over FY19E-21E. We were surprised to note that the company has stopped sharing market share, particularly at a time when market share is bottoming out (as per our discussion with management). Colgate’s performance is playing out as per our thesis, i.e. recovery will be gradual and performance will be modest, given presence in a category growing slower than FMCG sector (5-6% vs. 8-10% volume growth). We expect oral care category growth to accelerate to 7-8% volume growth with a pick-up in rural consumption (revert to mean i.e. 1.5x urban growth vs 1.3x currently). We build 7.5% volume growth for Colgate in FY20E/21E. Despite building healthy recovery, we arrive at a NEUTRAL rating. We value based on P/E of 35x on Dec-20 EPS with TP of Rs 1,254. Highlights of the quarter 11% EBITDA growth: GM was flat owing to increased promotional intensity. ASP growth was up 4% YoY (44% in 3QFY18). Cost savings led to modest growth in Employee/other expenses (-5/5%). EBITDA margin expanded by 127bps to 28.6% (exp. of 30bps). Near-term outlook: We prefer other FMCG stocks like (ITC, Dabur and Marico) which can report positive earnings surprise in the near-term. Financial Summary (Rs mn) 3QFY19 3QFY18 YoY (%) 2QFY19 QoQ (%) FY17 FY18 FY19E FY20E FY21E Net Sales 10,994 10,333 6.4 11,680 (5.9) 39,818 41,880 44,839 49,647 54,984 EBITDA 3,145 2,824 11.3 3,296 (4.6) 9,444 11,124 12,631 14,388 16,374 APAT 1,921 1,707 12.6 1,964 (2.2) 5,774 6,637 7,588 8,723 10,092 Diluted EPS (Rs) 7.1 6.3 12.6 7.2 (2.2) 21.2 24.4 27.9 32.0 37.1 P/E (x) 62.3 54.2 47.4 41.2 35.7 EV / EBITDA (x) 37.8 31.9 28.1 24.5 21.3 Core RoCE (%) 64.5 64.4 68.8 77.7 89.4 Source: Company, HDFC sec Inst Research INDUSTRY FMCG CMP (as on 24 Jan 2019) Rs 1,322 Target Price Rs 1,254 Nifty 10,850 Sensex 36,195 KEY STOCK DATA Bloomberg CLGT IN No. of Shares (mn) 272 MCap (Rs bn)/(US$ mn) 360/5,048 6 m avg traded value (Rs mn) 609 STOCK PERFORMANCE (%) 52 Week high / low Rs 1,365/1,012 3M 6M 12M Absolute (%) 18.5 18.3 15.5 Relative (%) 12.1 20.0 15.4 SHAREHOLDING PATTERN (%) Promoters 51.00 FIs & Local MFs 11.85 FIIs 13.86 Public & Others 23.29 Source : BSE Naveen Trivedi [email protected]+91-22-6171-7324 Siddhant Chhabria [email protected]+91-22-6171-7336
Transcript
RESULTS REVIEW 3QFY19 24 JAN 2019
Colgate-Palmolive (India)
NEUTRAL
HDFC securities Institutional Research is also available on Bloomberg HSLB <GO>& Thomson Reuters
Nothing to cheer about Colgate reported an in-line quarter with revenue growth of 6.5% (exp. 8.5%) driven by volume growth of 7% (exp. 6.5%). The co. has increased its trade and consumer promotional intensity resulting in softer revenue growth and gross margin pressure. EBITDA/APAT grew by 11/13% (exp. 10/12%).
Natural’s category (~25% mix) is now growing at a slower pace (15% growth vs. 25% earlier). Colgate’s market share pressure is easing (although gradually) owing to (1) Naturals category growing at a slower rate, (2) Pan-India launch of Swarna Vedshakti and (3) Increased promotional intensity. Colgate’s premium portfolio (eg. Colgate Sensitive, Total etc) was earlier declining at a brisk pace, now witnessing slower declines (4% mix vs. 8% 2 years ago). The co. is focusing on driving volume growth via aggressive promotional intensity and re-launch of its flagship product (Colgate dental cream).
We sense that the management looks to protect market share in their core brands and at the same time gain share in the ‘naturals’ portfolio with product launches. We expect this strategy to deliver 11% revenue CAGR over FY19E-21E.
We were surprised to note that the company has stopped sharing market share, particularly at a time when market
share is bottoming out (as per our discussion with management).
Colgate’s performance is playing out as per our thesis, i.e. recovery will be gradual and performance will be modest, given presence in a category growing slower than FMCG sector (5-6% vs. 8-10% volume growth). We expect oral care category growth to accelerate to 7-8% volume growth with a pick-up in rural consumption (revert to mean i.e. 1.5x urban growth vs 1.3x currently). We build 7.5% volume growth for Colgate in FY20E/21E. Despite building healthy recovery, we arrive at a NEUTRAL rating. We value based on P/E of 35x on Dec-20 EPS with TP of Rs 1,254.
Highlights of the quarter
11% EBITDA growth: GM was flat owing to increased promotional intensity. ASP growth was up 4% YoY (44% in 3QFY18). Cost savings led to modest growth in Employee/other expenses (-5/5%). EBITDA margin expanded by 127bps to 28.6% (exp. of 30bps).
Near-term outlook: We prefer other FMCG stocks like (ITC, Dabur and Marico) which can report positive earnings surprise in the near-term.
Revenue growth of 6.4% (exp 8.5%) was driven by 7% volume growth (6.5% exp) Management states that market share was flat during 3QFY19 Gross margins were under pressure due to increased promotional intensity EBITDA margin expansion was driven by cost savings drive
COLGATE-PALMOLIVE : RESULTS REVIEW 3QFY19
Page | 3
Net Revenue Volume Growth
Source: Company, HDFC sec Inst Research Note: 1QFY16-4QFY16 growth is based on old AS
Source: Company, HDFC sec Inst Research
Gross Margin Change EBITDA Margin Change
Source: Company, HDFC sec Inst Research Note: 1QFY16-4QFY16 change is based on old AS
Source: Company, HDFC sec Inst Research Note: 1QFY16-4QFY16 change is based on old AS
Volume growth was driven by increased promotional intensity. Co is focusing on arresting market share decline Colgate enjoyed benign commodity inflation in 1HFY19 resulting in gross margin expansion Favourable base and cost control initiatives continue to expand EBITDA margins
(15.0)
(10.0)
(5.0)
-
5.0
10.0
15.0
20.0
25.0
-
3,000
6,000
9,000
12,000
3QFY
16
4QFY
16
1QFY
17
2QFY
17
3QFY
17
4QFY
17
1QFY
18
2QFY
18
3QFY
18
4QFY
18
1QFY
19
2QFY
19
3QFY
19
Net Sales YoY Growth - RHS
(Rs mn) (%)
1
6 6 4
(12)
(3)(5)
(1)
12
4 4
7 7
(15)
(10)
(5)
-
5
10
15
3QFY
16
4QFY
16
1QFY
17
2QFY
17
3QFY
17
4QFY
17
1QFY
18
2QFY
18
3QFY
18
4QFY
18
1QFY
19
2QFY
19
3QFY
19
(%)
120
34
139
91 76
142 108
41
130
302
255
136
(5)
(100)
10
120
230
340
3Q
FY1
6
4Q
FY1
6
1Q
FY1
7
2Q
FY1
7
3Q
FY1
7
4Q
FY1
7
1Q
FY1
8
2Q
FY1
8
3Q
FY1
8
4Q
FY1
8
1Q
FY1
9
2Q
FY1
9
3Q
FY1
9
(bps)
326
(211)
(105)(35) (47) (21)
183 171
286
462 436
51 127
(300)
(50)
200
450
700
3Q
FY1
6
4Q
FY1
6
1Q
FY1
7
2Q
FY1
7
3Q
FY1
7
4Q
FY1
7
1Q
FY1
8
2Q
FY1
8
3Q
FY1
8
4Q
FY1
8
1Q
FY1
9
2Q
FY1
9
3QFY
19
(bps)
COLGATE-PALMOLIVE : RESULTS REVIEW 3QFY19
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Employee Expense Advertising Expense
Source: Company, HDFC sec Inst Research Note: 1QFY16-4QFY16 growth is based on old AS
Source: Company, HDFC sec Inst Research Note: 1QFY16-4QFY16 growth is based on old AS
Gross Margin EBITDA Margin
Source: Company, HDFC sec Inst Research Source: Company, HDFC sec Inst Research
Colgate has rationalised its employee and advertising spend to drive EBITDA growth
9 13
16
26
(1)
2
(2)
13 15
(1)
3
(7) (5)
4.0
5.0
6.0
7.0
8.0
(25)
(10)
5
20
35
3Q
FY1
6
4Q
FY1
6
1Q
FY1
7
2Q
FY1
7
3Q
FY1
7
4Q
FY1
7
1Q
FY1
8
2Q
FY1
8
3Q
FY1
8
4Q
FY1
8
1Q
FY1
9
2Q
FY1
9
3Q
FY1
9
Employee Gr. (%) Employee (% of sales) - RHS(%)
(11)
28 24
28
(21)
24
(8) (7)
44
(0)
0
17
4
-
2
4
6
8
10
12
14
16
18
20
(30)
-
30
60
3Q
FY1
6
4Q
FY1
6
1Q
FY1
7
2Q
FY1
7
3Q
FY1
7
4Q
FY1
7
1Q
FY1
8
2Q
FY1
8
3Q
FY1
8
4Q
FY1
8
1Q
FY1
9
2Q
FY1
9
3Q
FY1
9
Advertising Gr. (%) Advertising (% of sales) - RHS(%)
Source: Company, HDFC sec Inst Research Source: Company, HDFC sec Inst Research
The management states that market share decline has been arrested Market share declines for Colgate in toothpaste have come from its premium segment (Colgate Sensitive and Colgate Total). The premium segment revenue contribution is at ~4% vs. ~8% earlier Colgate continued to face intense competition in the naturals segment (25% mix for industry) which is dominated by Dabur and Patanjali (80% combined share)
Source: Company, HDFC sec Inst Research Source: Company, HDFC sec Inst Research
Toothbrush Market Share
Source: Company, HDFC sec Inst Research
Toothbrush volume market growth has been steady at ~10% while price growth has declined to 2% in last 3 quarters vs. 8-9% average during FY16-FY17 Higher competitive intensity from P&G (Oral-B) and unorganized players in toothbrush led to 130bps decline in vol. market share to 44.2%
-16.0%
-8.0%
0.0%
8.0%
16.0%
24.0%
32.0%
1Q
CY1
5
2Q
CY1
5
3Q
CY1
5
4QCY
15
1Q
CY1
6
2Q
CY1
6
3Q
CY1
6
4Q
CY1
6
1Q
CY1
7
2Q
CY1
7
3Q
CY1
7
4Q
CY1
7
1Q
CY1
8
Volume Growth Price Growth
9.3%
-4.1%
12.0%
10.3%
11.0%
3.1%
-7.0%
1.0%
9.0%
17.0%
25.0%
CY15
CY16
CY17
Volume Growth Price Growth
33.4
38.4 38.035.9
39.842.3 42.8 44.4
47.345.1
11.4 11.914.8
17.8 18.8 18.4 18.2 17.414.6 14.2
5.9 6.4 7.2 7.2 6.7 7.5 7.9 9.3 10.7 11.0
0.0
10.0
20.0
30.0
40.0
50.0
60.0
CY08 CY09 CY10 CY11 CY12 CY13 CY14 CY15 CY16 CY17
Colgate Competitor 1 Competitor 2(%)
COLGATE-PALMOLIVE : RESULTS REVIEW 3QFY19
Page | 7
Per Capita Consumption
Source: Company, HDFC sec Inst Research
Assumptions
FY17 FY18 FY19E FY20E FY21E
Toothpaste revenue growth 3.7 7.4 7.4 10.7 10.7
Toothpaste volume growth (2.0) 2.5 6.4 7.5 7.5
GM (%) 62.9 64.4 65.4 66.2 66.8
Employee (% of sales) 7.2 7.3 6.7 6.6 6.4
ASP (% of sales) 12.9 12.6 12.6 12.8 12.7
Distribution (% of sales) 3.6 3.1 3.0 3.0 3.0
Royalty (% of sales) 5.2 4.9 4.9 4.9 4.9
Other expenses (% of sales) 10.3 9.9 9.9 9.9 9.9
EBITDA Margin (%) 23.7 26.6 28.2 29.0 29.8
Tax Rate (%) 32.2 31.5 33.0 33.0 33.0
Source: Company, HDFC sec Inst Research
We expect oral care category growth to accelerate to 7-8% volume growth with a pick-up in rural consumption (revert to mean i.e. 1.5x urban growth vs 1.3x currently). We build 7.5% volume growth in FY20E/21E.
Rating Definitions BUY : Where the stock is expected to deliver more than 10% returns over the next 12 month period NEUTRAL : Where the stock is expected to deliver (-)10% to 10% returns over the next 12 month period SELL : Where the stock is expected to deliver less than (-)10% returns over the next 12 month period
Date CMP Reco Target
12-Jan-18 1,125 NEU 1,139
6-Feb-18 1,121 NEU 1,163
12-Mar-18 1,038 BUY 1,204
11-Apr-18 1,091 BUY 1,204
21-May-18 1,208 NEU 1,203
9-Jul-18 1,183 NEU 1,219
27-Jul-18 1,085 NEU 1,185
10-Oct-18 1,050 NEU 1,164
29-Oct-18 1,102 NEU 1,163
9-Jan-19 1,311 NEU 1,248
24-Jan-19 1,322 NEU 1,254
800
900
1,000
1,100
1,200
1,300
1,400
Jan
-18
Feb
-18
Mar
-18
Ap
r-1
8
May
-18
Jun
-18
Jul-
18
Au
g-1
8
Sep
-18
Oct
-18
No
v-1
8
De
c-1
8
Jan
-19
Colgate TP
COLGATE-PALMOLIVE : RESULTS REVIEW 3QFY19
Page | 12
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