Reduce - Colgate Palmolive (India) Ltd.

INVESTMENT RATIONALE

Strong Fundamentals, Expensive Valuations: Colgate Palmolive, leader in Indian oral care space enjoying 52% market share in toothpaste category witnessed 16% overall volume growth in Sep09Q. Historically, Colgate has traded at a P/E multiple of 15x – 25x. Though we are confident on the fundamentals of the company, and strong performance, we feel that the valuations are expensive. Currently its trading at 33.3x FY09EPS of Rs. 21.0. Though there has not been any impact so far due to delayed monsoons, we might see some lag effect of it in H2FY10 coupled with inflationary pressure on margins. 

Key Developments

Toothpaste category grew 18% in volume terms. CPIL continued to maintain its leadership position in the toothpaste category with 52.0% market share (Jan’09-Sep’09). It has been able to increase its market share in toothbrush category from 37.7% in 2008 to 38.8% in 2009 till date and clocked a total growth of 15% during the quarter. CPIL has witnessed some pressure in its toothpowder category with degrowth in volumes.

Q2CY09 Financials:

Net sales of Colgate Palmolive (India) Ltd. (CPIL) increased 18% y-o-y to Rs. 487.3 crore, driven by strong volume growth of 16% backed by demand from rural India for small pack size units. CPIL did not go for any price increase during the Q2FY10, realization growth was a result of the price increase taken up in the month of Apr’09. EBITDA improved 61% y-o-y to Rs. 110.6 crore Robust improvement in OPM of 603bps y-o-y to 22%. Net profit increased 41% y-o-y to Rs. 89.7 crore. NPM improved 302bps y-o-y to 18% inspite of increase in the
effective tax rate to Rs. 19.4% from 11.9% in Sep08Q. Rise in effective tax rate y-o-y was mainly due to tax refund which the company had during the last year.

Valuations

At current price of Rs 698.0 the stock is trading at 33.3x FY09 EPS of Rs. 21.0.
We recommend a “REDUCE” on the stock with a 12 month target price of Rs. 645.

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