RESULTS REVIEW 2QFY19 29 OCT 2018 Colgate-Palmolive (India) NEUTRAL Recovery will be gradual Colgate registered 7/8% volume/value growth as compared to exp. of 5/8%. There is a slight recovery in revenue growth considering 4% revenue CAGR during the last 8 quarters. Colgate enjoyed the benefits of pan-India launch of Swarna Vedshakti (naturals). Soft input inflation and decline in employee expense led to EBITDA/APAT growth of by 10/11% (exp. 12/15%). After a long delay, we noticed first signs of aggression from the management with a (1) Spike in ASP (+17% YoY), although on a favorable base, (2) National launch of Swarna with wider SKUs (positive response in modern trade) and (3) Relaunch of their flagship brand – Colgate Strong Teeth (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 10% revenue CAGR over FY18- 21E. Market share of toothpaste declined by 150bps YoY to 52.5% (down ~500bps from its peak in FY16) but was flat on a QoQ basis. Dabur and Patanjali (80% combined market share in naturals segment) continued to gain share driven by naturals segment (25% share in the category). Toothbrush market share declined by 130bps YoY to 44.2% (40bps decline on QoQ basis) on account of increased promotional activity by competitors. Toothpaste industry continues to chug along at 5-6% volume growth. Rural is growing at slower than historical gap vs. urban (150-200bps faster than urban vs. historical delta of 400-500bps). We believe with pickup in rural consumption, volume growth can accelerate to 6-7% for the category. We are yet to see a complete rehab and believe market share recovery will be gradual. Owing to stiff competition, we expect Colgate to continue to spend abundantly on marketing (~13% of sales). We value based on P/E of 35x on Sep- 20 EPS to arrive at a TP of Rs 1,163. Highlights of the quarter 10% EBITDA growth: GM expanded by 135bps to 64.8% owing to benign commodity inflation. ASP growth was up 17% YoY (-7% in 2QFY18). Employee/other expenses grew by -7/14%. EBITDA margin expanded by 50bps to 28% (exp. of 99bps). Near-term outlook: We prefer other mid-cap FMCG stocks like (Marico and Dabur) which provide stronger earnings visibility. Financial Summary (Rs mn) 2QFY19 2QFY18 YoY (%) 1QFY19 QoQ (%) FY17 FY18 FY19E FY20E FY21E Net Sales 11,680 10,849 7.7 10,413 12.2 39,818 41,338 44,852 49,688 55,077 EBITDA 3,296 3,006 9.6 2,816 17.0 9,444 11,124 12,411 14,021 15,926 APAT 1,964 1,776 10.6 1,656 18.6 5,774 6,637 7,650 8,451 9,742 Diluted EPS (Rs) 7.2 6.5 10.6 6.1 18.6 21.2 24.4 28.1 31.0 35.8 P/E (x) 51.9 45.2 39.2 35.5 30.8 EV / EBITDA (x) 31.4 26.5 23.8 20.8 18.1 Core RoCE (%) 64.5 64.4 68.4 78.4 91.9 Source: Company, HDFC sec Inst Research INDUSTRY FMCG CMP (as on 29 Oct 2018) Rs 1,102 Target Price Rs 1,163 Nifty 10,251 Sensex 34,067 KEY STOCK DATA Bloomberg CLGT IN No. of Shares (mn) 272 MCap (Rs bn)/(US$ mn) 300/4,081 6 m avg traded value (Rs mn) 553 STOCK PERFORMANCE (%) 52 Week high / low Rs 1,274/1,006 3M 6M 12M Absolute (%) (0.0) 0.9 5.1 Relative (%) 8.7 3.4 2.4 SHAREHOLDING PATTERN (%) Promoters 51.00 FIs & Local MFs 13.11 FIIs 13.25 Public & Others 22.64 Source : BSE Naveen Trivedi [email protected]+91-22-6171-7324 Siddhant Chhabria [email protected]+91-22-6171-7336 HDFC securities Institutional Research is also available on Bloomberg HSLB <GO>& Thomson Reuters
Transcript
RESULTS REVIEW 2QFY19 29 OCT 2018
Colgate-Palmolive (India) NEUTRAL
Recovery will be gradual Colgate registered 7/8% volume/value growth as compared to exp. of 5/8%. There is a slight recovery in revenue growth considering 4% revenue CAGR during the last 8 quarters. Colgate enjoyed the benefits of pan-India launch of Swarna Vedshakti (naturals). Soft input inflation and decline in employee expense led to EBITDA/APAT growth of by 10/11% (exp. 12/15%). After a long delay, we noticed first signs of aggression from the management with a (1) Spike in ASP (+17% YoY), although on a favorable base, (2) National launch of Swarna with wider SKUs (positive response in modern trade) and (3) Relaunch of their flagship brand – Colgate Strong Teeth (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 10% revenue CAGR over FY18-21E. Market share of toothpaste declined by 150bps YoY to 52.5% (down ~500bps from its peak in FY16) but was flat on a QoQ basis. Dabur and Patanjali (80% combined market share in naturals segment) continued to gain share driven by naturals segment (25% share in the category). Toothbrush market share declined by
130bps YoY to 44.2% (40bps decline on QoQ basis) on account of increased promotional activity by competitors. Toothpaste industry continues to chug along at 5-6% volume growth. Rural is growing at slower than historical gap vs. urban (150-200bps faster than urban vs. historical delta of 400-500bps). We believe with pickup in rural consumption, volume growth can accelerate to 6-7% for the category. We are yet to see a complete rehab and believe market share recovery will be gradual. Owing to stiff competition, we expect Colgate to continue to spend abundantly on marketing (~13% of sales). We value based on P/E of 35x on Sep-20 EPS to arrive at a TP of Rs 1,163. Highlights of the quarter 10% EBITDA growth: GM expanded by 135bps to
64.8% owing to benign commodity inflation. ASP growth was up 17% YoY (-7% in 2QFY18). Employee/other expenses grew by -7/14%. EBITDA margin expanded by 50bps to 28% (exp. of 99bps).
Near-term outlook: We prefer other mid-cap FMCG stocks like (Marico and Dabur) which provide stronger earnings visibility.
Volume growth of 7% was ahead of our expectations of 5%. Market share of toothpaste declined by 150bps YoY to 52.5% (down ~500bps from its peak in FY16) but was flat on a QoQ basis. ASP spend was higher on account of launches, relaunches and focus on driving digital campaigns EBITDA margin expansion was driven by soft commodity inflation and lower employee expenses
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COLGATE-PALMOLIVE : RESULTS REVIEW 2QFY19
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 challenges have persisted for the past several quarters driven by slower category growth and market share losses Soft commodity inflation has driven 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
2QFY
163Q
FY16
4QFY
161Q
FY17
2QFY
173Q
FY17
4QFY
171Q
FY18
2QFY
183Q
FY18
4QFY
181Q
FY19
2QFY
19
Net Sales YoY Growth - RHS
(Rs mn) (%)
3 1
6 6 4
(12)
(3)(5)
(1)
12
4 4 7
(15)
(10)
(5)
-
5
10
15
2QFY
16
3QFY
16
4QFY
16
1QFY
17
2QFY
17
3QFY
17
4QFY
17
1QFY
18
2QFY
18
3QFY
18
4QFY
18
1QFY
19
2QFY
19
(%)
137 120
34
139 91 76
142 108
41
130
302 255
136
(100)
10
120
230
340
2QFY
16
3QFY
16
4QFY
16
1QFY
17
2QFY
17
3QFY
17
4QFY
17
1QFY
18
2QFY
18
3QFY
18
4QFY
18
1QFY
19
2QFY
19
(bps)
591
326
(211)(105)
(35) (47) (21)
183 171
286
462 436
51
(300)
(50)
200
450
700
2QFY
16
3QFY
16
4QFY
16
1QFY
17
2QFY
17
3QFY
17
4QFY
17
1QFY
18
2QFY
18
3QFY
18
4QFY
18
1QFY
19
2QFY
19
(bps)
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COLGATE-PALMOLIVE : RESULTS REVIEW 2QFY19
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
We expect ASP spend to be firm in the near-medium term at ~13% of sales
(16)
9 13
16
26
(1)
2
(2)
13 15
(1)
3
(7)
4.0
5.0
6.0
7.0
8.0
(25)
(10)
5
20
35
2QFY
16
3QFY
16
4QFY
16
1QFY
17
2QFY
17
3QFY
17
4QFY
17
1QFY
18
2QFY
18
3QFY
18
4QFY
18
1QFY
19
2QFY
19
Employee Gr. (%) Employee (% of sales) - RHS(%)
(17)(11)
28 24
28
(21)
24
(8) (7)
44
(0)
0
17
-2 4 6 8 10 12 14 16 18 20
(30)
-
30
60
2QFY
16
3QFY
16
4QFY
16
1QFY
17
2QFY
17
3QFY
17
4QFY
17
1QFY
18
2QFY
18
3QFY
18
4QFY
18
1QFY
19
2QFY
19
Advertising Gr. (%) Advertising (% of sales) - RHS(%)
Source: Company, HDFC sec Inst Research Source: Company, HDFC sec Inst Research Toothbrush Market Share
Source: Company, HDFC sec Inst Research
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 Per Capita Consumption
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%
With stiff competition, we expect Colgate to continue to spend abundantly on marketing (13%). We foresee low-margin expansion of ~200bps over FY18-21E vs. ~600bps in the past three years
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 10-Oct-17 1,090 NEU 1,112 13-Nov-17 1,063 NEU 1,110 27-Dec-17 1,082 NEU 1,118 12-Jan-18 1,125 NEU 1,139 6-Feb-18 1,121 NEU 1,163
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
800
900
1,000
1,100
1,200
1,300
Oct
-17
Nov-
17
Dec-
17
Jan-
18
Feb-
18
Mar
-18
Apr-
18
May
-18
Jun-
18
Jul-1
8
Aug-
18
Sep-
18
Oct
-18
Colgate TP
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COLGATE-PALMOLIVE : RESULTS REVIEW 2QFY19
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