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TEAM ID – 1003 Colgate
Recommendation: SELL Market Cap: Rs Cr. 5,166.64
Colgate-Palmolive is the leader in the Rs. 3000 crore oral care industry, with dominance in all the three major segments viz. toothpaste, toothpowder and toothbrush. H I G H L I G H T S: The company is expected to increase its topline at
a pace faster than the industry average. This is due
to successful launch of new products and better
price realizations. It is expected to grow at 12%
(CAGR FY06-10)
The bottom line of the company is expected to
increase at a faster rate, thanks to the shift of
production to an excise and tax free facility. The
net profit margins are expected to increase by 261
basis points from FY2006-10
Using the discounted cash flow model, we arrive
at an intrinsic value of Rs 255.50 per share. This
is way below the CMP. Using the Intrinsic P/E
methodology, we arrive at a value of Rs. 267.57,
again a significant discount to the CMP
Using the reverse DCF method, the market
expects the company’s topline to grow by 14%
p.a. and its FCF to grow by 11% p.a. (assuming
terminal FCF growth of 5%). This growth is not
sustainable in the current market environment
Price: Rs. 379.90
12 Month Price Objective: Rs. 255.50
Estimates 2007E 2008E 2009E
Net income (Rs. mn)
1,593.0
2,134.6
2,357.7
EPS 11.71 15.70 17.34
P/E 32.43 24.20 21.91
EPS Growth % 20.3% 34.0% 10.4%
EV/EBITDA 23.78 18.93 16.74
ROE 54.6% 66.9% 67.6%
Investment Argument
The company’s expected growth in
sales and profits does not support the
current share price. Although, the
company is expected to increase
profits significantly, the stock is still
highly overvalued at current levels
The company is highly dependant on
oral care (95% of sales), thus
increasing the risk. Further
competition is expected to increase in
the future with the rise of private
labels.
COMPANY BACKGROUND
Source: www.capitaline.com
Colgate Palmolive India is a 51 % subsidiary of Colgate Palmolive Company, USA. It is
the market leader in the Indian oral care market, with a 51 % market share in the
toothpaste segment, 48 % market share in the toothpowder market and 30 % share in the
toothbrush market. It is a top player in the oral care segment in India and its most
prominent brand, Colgate Dental Cream has become synonymous with the product
category. The company also has a presence in the premium toilet soap segment and in
shaving products, which are sold under the Palmolive brand. Other well-known consumer
brands include Charmis skin cream and Axion dish wash. The company's strategy is to
focus on growing volumes by improving penetration through aggressive campaigning and
consumer promotions. Margin gains are being targeted through efficient supply chain
management and bringing down cost of operations. Colgate has managed to maintain its
leadership position in the oral care segment and increase its EPS in spite of growing
competition in the past few years.
60.00
80.00
100.00
120.00
140.00
160.00
180.00
02/12/2005 01/03/2006 30/05/2006 23/08/2006 17/11/2006
ColgateBSE SensexBSE FMCG Index
Source: www.colgate.co.in
Source: www.colgate.co.in
OWNERSHIP PATTERN
The company is promoted by its parent company Colgate Palmolive, USA and 51% of it
stock is owned by its parent company.
Source: www.bseindia.com
NET PROFIT
88.66108 113.26
137.6
020406080
100120140160
Mar 03(12) Mar 04(12) Mar 05(12) Mar 06(12)
YEAR
In R
s. c
r
EPS
6.267.17 7.4
9.07
0
2
4
6
8
10
Mar 03(12) Mar 04(12) Mar 05(12) Mar 06(12)
Year
in R
s.
HOLDING DETAILS
51
3.0710.57
35.36 promotersMF/FIsFIIsPublic and Others
MANAGEMENT OF THE COMPANY
Colgate is a professionally managed company, with Mr. Roger Calmeyer leading the
company since Jun 2006. Colgate has a team of people who have varied domestic and
foreign experience.
Source: www.colgate.co.in
As one of the world's most widely recognized consumer brands and one of India's best
employers, Colgate attracts the country's best talent at various levels. It provides training
and development to enhance and develop the skills of its employees and follows a merit
based approach to reward talent.
Even while closing down its Sewri plant and Nepal subsidiary, it provided VRS to its
workers and employees. In Nepal, the political instability and deteriorating political
situation is a source of concern to the company and it has taken steps to protect its assets
and its people.
PRODUCTS ANALYSIS
Colgate is present in 2 segments in India:
• Oral care
• Personal and home care
Mr. Roger Calmeyer
VP South Asia and MD, India
Moses A Elias
Exec VP and CFO
K Vaidyanathan
VP and Company Secretary
Debashish Roy
VP Human Resources
Vinay Hegde
Exec VP Marketing
Shekar Bharadwaj
VP Sales
Arun Pande
VP Info Technology
Surendra Manek
VP
R&D
Lawrence Wheeler
Exec VP
Manu. And Supply Chain
Source: Company Data and Team Estimates
The company derives 90% of its revenues from the oral care segment consisting of
toothpaste, toothpowder and toothbrush. In the personal segment the company’s offerings
include shower gel and cream, liquid hand wash, shaving cream, skin cream and dish
wash.
ORAL CARE
Toothpastes
Colgate Dental Cream, Colgate Total 12, Colgate Max Fresh, Colgate
Kids Toothpaste, Colgate Fresh Energy Gel, Colgate Herbal, Colgate
Cibaca Family Protection, Colgate Advanced Whitening, Colgate
Active Salt
Toothbrushes
Colgate Kids, Colgate 360, Colgate Navigator Plus, Colgate
Sensitive, Colgate Super Junior Flexible, Colgate Extra Clean,
Colgate Cibaca Top, Colgate Motion, Colgate Massager, Colgate
Super Child Flexible, Colgate Super Flexible, Colgate Zig Zag Junior,
Colgate Zig Zag, Colgate Zig Zag Plus
Toothpowder Colgate Toothpowder
PERSONAL CARE
Shower Gel Palmolive Aroma Shower Gel( Sensual, Relax, Vitality)
Shower Crème Palmolive Aroma Creme( Exotic and Calming)
Bar Soaps Palmolive Aroma Soap (Revive and Relax)
Revenue Break Up
72%
14%
9% 3% 2%
ToothpasteToothpowderToothbrushShaving CreamOthers
Liquid Hand
Wash Palmolive Aroma Liquid Hand Wash
Shaving Cream Palmolive Shave Cream
Skin Cream Palmolive Charmis Cream
HOUSEHOLD CARE
Dish Wash Axion Dish Washing Paste
Source: www.colgate.co.in
In addition to these products, Colgate also has oral pharmaceuticals products for mouth
ulcer, tooth whitening, sensitivity treatment etc.
INDUSTRY ANALYSIS
Analysis of the Toothpaste Market in India
The toothpaste market in India is worth around Rs. 2200-2500 cr. with a penetration of
around 50%.
Source: www.ibef.org
With only 50% of the population using toothpastes, per capita usage of toothpaste is
much lower than even countries like China and Malaysia. India’s per capita consumption
of toothpaste is 90 gms per month whereas that of China and Malaysia is 219 and 285
gms per month.
However, the category has been growing and the penetration of both dentrifices and
toothpastes has been increasing over the past few years.
Source: www.colgate.co.in
With rise in per capita incomes and awareness of oral hygiene, the growth potential is
huge. Lower price and smaller packs are also likely to drive potential uptrading.
The penetration levels have increased from 46% in 2004 to 51% in H1 2006. If we take
population as constant there has been a CAGR of 7.12% from 2004 to H1 2006. The
population of India is growing at an average annual growth rate of 1.6%. Thus, taking
both these effects into consideration, we expect volumes of the toothpaste industry to
grow by 8.84% p.a. in the near future.
Competitor Analysis:
Colgate has been present in the domestic oral care market for the past 70 years and its
brand name ‘Colgate’ is synonymous with its product category. It occupies a dominant
position with 48% market share and its relative market share is 1.5 times the second
player, HLL. HLL and Colgate control around 80% of the market with their 2 prominent
toothpaste brands, Colgate and Pepsodent. Recently, with the acquisition of Balsara
Dabur has managed to capture 7.2% of the market share and emerge as the third player.
There are essentially 2 price points in this category. The normal segment consists of
brands like Colgate, Pepsodent, Close-Up, Meswak, Vicco etc, whereas the low price
segment has brands like Cibaca, Anchor and Babool.
The company has launched 3 new products during the year – Colgate Active Salt,
CATEGORY PENETRATION
0
10
20
30
40
50
60
70
80
2001 2002 2003 2004 2005 H1 2006
YEAR
%
TooothpasteDentrifice
Colgate Advanced Whitening and Colgate Max Fresh Gel. These new releases along with
a 4% hike in prices during the year have helped Colgate post 13.5% hike in sales.
Source: Analyst Reports
Analysis of the Toothpowder Market in India
The toothpowder market in India is worth around Rs. 250 cr. and Colgate is the market
leader in this segment with 44% market share. Its relative share is around 1.5 times the
second player, Dabur.
However, this market is declining, with penetration levels remaining at 35% for the last 3
years. This is primarily because people are shifting to toothpaste.
Source: www.colgate.co.in
Toothpowder Penetration
34.434.634.8
3535.235.435.635.8
3636.2
2001 2002 2003 2004 2005 H1 2006
Year
% Toothpowder
Since the penetration levels have remained stagnant over the past few years, we do not
expect any major growth in this segment. We have taken a CAGR of 1.6% for this
segment considering the rise in volume only due to population growth.
Analysis of the Toothbrush Market in India
Colgate is the leader in the toothbrush category with 34% market share and almost 2
times bigger than the next player in the market. The toothbrush market is worth around
Rs. 500 cr. its competitors include Dabur, Gillette and smaller players like Anchor.
To estimate the likely growth in the toothbrush segment, we have assumed the
penetration levels of the toothbrush segment to be the same as that of the toothpaste
segment. Thus we are assuming that the brush segment would continue to grow at the
same pace as the toothpaste segment i.e. 8.84%
Other Product Categories
In addition to the above segments, Colgate also has products such as shaving cream,
shower gel, skin cream, liquid hand soap and dish wash paste. Also Colgate exports
around Rs. 6 cr. worth of products which amounts to around 0.5% of its total turnover.
CATEGORY
VALUE
SHARE (%) RANKING RELATIVE SHARE
Toothpaste 47.60 1 1.6
Toothpowder 43.80 1 1.5
Toothbrush 34.30 1 2.1
Shower Gel 39.60 2 0.8
Liquid Hand Soap 3.60 3 0.2
Shaving Cream 11.00 3 0.6
Cold Cream 4.20 4 0.1
Source: www.colgate.co.in
DISTRIBUTION SYSTEM OF COLGATE
A strong distribution network is the key to the success of an FMCG firm. Colgate has
backed its products with a robust country-wide distribution network. Colgate is the
second most widely distributed product of the company. It is further trying to improve its
reach by tying up E-Choupal and Disha.
SWOT ANALYSIS
Strengths:
• One of the biggest strength of the company is the ‘Colgate’ brand. This brand has
become synonymous with toothpaste and this creates a formidable entry barrier for
other firms to enter the toothpaste segment
• Colgate is the market leader in oral care in India with almost 50% share. Its share is
1.5 times the second largest player, HLL. In the toothpowder segment too, its relative
share is 1.5 times the second largest player, Dabur.
Weaknesses:
• Colgate derives almost 90% of its revenues from oral care business. Thus the profits
of the company are totally dependant on one segment. However, it can change this by
bringing out products under the personal care. Colgate has started moving in this
direction by introducing products under the high-end products like shower gel and
soap bars under the brand Palmolive Aroma Therapy
Opportunity
• Although 75% of the households use toothpaste in urban areas, in the rural areas the
penetration level is still at 40%. Toothpaste consumption in India is very low at 92
grams per household per month as against 219 grams per household per month in
China.
Threats
• Competition is increasing from Dabur since has acquired Balsara. Dabur has become
the third largest player in the toothpaste segment with brands like Babool, Meswak
and Promise and it currently commands a market share of 7.2%.
ASSUMPTIONS
Industry Growth Assumptions Colgate-Palmolive is a FMCG company but is primarily in the oral care industry. Oral
care accounts for over 95% of its gross revenues. The forecasts (for volumes only) for the
various sub-segments within the industry take into account the following:
• Penetration levels: The penetration in the various sub-segments is expected to
increase at historical levels (2004-2006H1; Sourced from Colgate investor
presentation)
• Population Growth: Expected Indian population growth for the years 2006-10
(sourced from US Census Bureau)
• Toothbrush industry: The segment has been assumed to increase at the same pace
as the toothpaste industry. This is because, as the penetration levels for the latter
increase, people switch over to toothbrushes. Also reliable penetration numbers
for toothbrushes were not available
• Shaving Cream: The growth forecasts have been taken from two sources, Enam
and FICCI. There was a slight variation, between the two, hence an average of the
two has been taken
Company Growth Assumptions The company growth has been forecasted based on the following factors:
• Industry Growth: The forecasted industry growth for the various sub-segments
• Pricing: Colgate is expected to benefit from price increases in certain categories.
This assumption is based on historical trend (over the last 6 quarters) and analyst
expectations. However the pricing leverage is expected to tighten in the future, as
competition from private labels is expected to increase in the FMCG space (AC
Nielsen study)
• Gain in Market Share: The company is assumed to continue (at a decreasing pace)
any market share gains/losses it has made historically (FY2004-YTD2006)
• Excise Savings: The Company’s net sales are expected to increase as its
toothpaste manufacturing plant is situated in tax free zone and is expected to go
on full production in 2007. Further it has been assumed that the company will
scale up of the facility in the near future (based on analyst expectations and
economic judgment)
Earnings Model Assumptions
• For 2007, the raw material, advertisement and the overheads costs (% of net sales)
are expected to be in line with the H1 2007 results
• Going forward, the raw material and the overhead costs are expected to grow at
the company’s volumes growth
• The advertisement & selling expenses (% of net sales) are expected to be in line
with the average of the last four quarters
• In 2007, the company is expected to make a capital expenditure of Rs. 500 million
to expand the Baddi plant. The company is expected to make only routine capital
expenditure over rest of the forecast horizon
• The company is expected to save income tax with the increased scale of
production from it’s Baddi plant (situated in a tax free zone in Himachal Pradesh)
• The company is expected to follow a consistent dividend policy, maintaining the
same payout ratio as followed in FY2006
Valuation Methods There are two main valuation methodologies that have been used in our report
• Discounted Cash Flow: This model forecasts the free cash flow generated by the
company and then takes out the present value of the cash flows using the
weighted average cost of capital (WACC) for the company. This model is based
on the premise that share price of a company should be equivalent to the present
value of the future earnings of the company
• Intrinsic P/E: The intrinsic P/E model examines the forecasted earnings and
growth rate, to determine the fundamental or intrinsic P/E value for a stock. The
P/E value has two components: the cost of equity for the company and the growth
factor. The former is calculated, on the basis of the capital asset pricing model
(CAPM), while the latter is based on the future growth potential of the company
Po/E1 (Implied P/E) = 1/E(R) + FF*G;
G = g/(E(R) - g);
FF = 1/E(R) - 1/ROE;
Where,
– Po/E1 is the Implied P/E
– E(R) is the cost of equity
– g is the growth factor, calculated as ROE*b
– ROE is the Return on Equity for 2007
– b is the retention rate or 1-dividend payout ratio
• Other Models: There are some other models on the basis of which we have
valued the company. However, there are some flaws to these models, as
detailed below
– Industry P/E: We use the industry average P/E to arrive at the value of the
company. The problem with this methodology is that markets might not
value the peers properly and hence all the stocks might be overvalued.
This will cause the industry P/E to be high as well, thus giving a high
value to the company
– Industry EV/EBITDA: We use the industry average EV/EBITDA value to
arrive at the Enterprise Value for the company. We can ascertain the
equity value of the company after removing the net debt from the EV. This
model faces the same problem as described above
– PEG Model: Using a rule of thumb, a stock with a PEG of 1 is considered
to be rightly valued. Using the 2007 P/E and five year EPS growth, we
calculate the PEG ratio for Colgate. Following the rule of thumb, we then
set the PEG = 1 and arrive at an implied P/E ratio and hence arrive at a
price level for the stock. The problem with this model is that PEG of 1 is a
rule of thumb only and not necessarily based on empirical data
COMPANY VALUATION We have arrived at the valuation for Colgate, using two different models. Using the DCF
and the intrinsic P/E model, we have arrived at a value of Rs. 255.5 per share and Rs.
267.57 per share respectively for Colgate-Palmolive. Since the current market price (Rs.
379.9) is above this, we give a SELL recommendation on the stock
Discounted Cash Flow (DCF) Model
Colgate-Palmolive 2007E 2008E 2009E 2010E 2011E 2012E 2013E 2014E 2015E 2016E
Sales 13,032.6 14,808.7 16,228.6 17,679.4 19,094 20,621 22,065 23,609 25,026 26,527 YoY Change (%) 15.93% 13.63% 9.59% 8.94% 8.00% 8.00% 7.00% 7.00% 6.00% 6.00% EBITDA 2,137.4 2,685.2 3,037.1 3,339.5 3,627.8 3,918.0 4,192.3 4,485.8 4,754.9 5,040.2 Margin (%) 16.40% 18.13% 18.71% 18.89% 19.00% 19.00% 19.00% 19.00% 19.00% 19.00% Tax (395.9) (368.9) (497.7) (613.7) (1,187.4) (1,282.4) (1,372.2) (1,468.2) (1,556.3) (1,649.7) Other Inflow 24.6 24.6 24.6 24.6 24.6 24.6 24.6 24.6 24.6 24.6 Total Cash Inflow 1,766.0 2,341.0 2,564.0 2,750.4 2,465.0 2,660.2 2,844.7 3,042.1 3,223.2 3,415.1 Capex (683.5) (183.5) (183.5) (183.5) (183.5) (183.5) (183.5) (183.5) (183.5) (183.5)
Change in Working Capital 85.7 75.0 72.0 79.3 79.3 79.3 79.3 79.3 79.3 79.3 Total Cash Outflow (597.8) (108.5) (111.5) (104.2) (104.2) (104.2) (104.2) (104.2) (104.2) (104.2) Free Cash Flow (FCF) 1,168.2 2,232.5 2,452.5 2,646.2 2,360.8 2,556.0 2,740.5 2,937.9 3,119.0 3,310.9
Source: Company Data, Team Estimates
• PV of Cash Flow = Rs. 14,491.7 million
• PV of Terminal Value = Rs. 21,098.7 million
• Total Present Value of Firm = Rs. 35,590.4 million
• Less: Net Debt (i.e. net of cash) = Rs. 836.1 million
• Equity Value = Rs. 34,754.3 million
• Shares outstanding = 136.0 million
• Intrinsic Value per share = Rs. 255.5
Sensitivity Analysis
Share Price (Rs)
Cost of Equity 9.50% 10% 10.50% 11% 11.50%
Terminal Growth
3% 247.8 228.5 212.0 197.3 184.6 4% 275.3 250.9 230.4 212.6 197.4 5% 315.0 282.2 255.5 233.1 214.2 6% 377.4 329.1 291.9 261.6 237.2 7% 489.6 407.3 348.9 304.5 270.3
Source: Team Estimates
(In Rs. Million)
Key Assumptions • Terminal growth rate of cash flow = 5%
• Beta = 0.596 (regressing against the BSE
Sensex for 3 years)
• Risk Free Rate: 7.52% (10 year
Government bond yield)
• Market Risk Premium = 5%
• Cost of Equity: 10.50%
• WACC (Discount rate) = 10.50%
(assuming negligible debt)
Intrinsic P/E Model
Po/E1 = 1/E(R)+FF*G; E(R) (Cost of Equity) 10.50% G = g/(E(R) -g) ROE (2007E) 54.6% = 1.73 b (Retention Rate) 12.2% FF = 1/E(R)-1/ROE g (ROE*b) 6.65% = 7.70 FF*G = 13.32 Po/E1 = 22.84 Target Price = 267.57
Source: Team Estimates
The DCF valuation model is among the most popular and fundamentally proven model
used to value companies. Since the model uses cash flows to determine the value of a
company, it is less susceptible to the vagaries of accounting policies followed the
companies. Hence based on the DCF model we value the Colgate-Palmolive stock at
Rs. 255.50.
Besides the above two models, we can use a PEG model to value the company. However
as state above, the PEG model is not empirically proven and is based only on a rule of
thumb. Also we look at industry averages to arrive at a value for the Colgate stock.
However, this model does not throw the correct value; as the market might have
overvalued the other companies as well, resulting in an incorrect valuation for Colgate
PEG Valuation Model
PEG 2007 P/E Estimated EPS CAGR (06-10)
Actual PEG 1.83 32.43 17.7%Required PEG 1 Required P/E 17.7 2007E EPS 11.71 Value of Share (Rs.) 207.33
Source: Team Estimates
Peer Valuation To do a comparative valuation of the company, we look at the two of its main
competitors in the oral care market viz. Hindustan Lever (HLL) and Dabur. Further, we
take two more companies from the FMCG sector viz. Nestle (India) and Marico.
At current prices, Colgate trades at 32x FY07 and 24x FY08 EPS, which is above and in
line of its industry peers. However, based on a superior expected EPS growth (27% for
FY06-08), the company’s PEG ratio is lower than the industry average.
Company Current Price
EV/Book Value
P/E EPS CAGR (06-08) PEG
EV/Sales EV/EBITDA 2007E 2008E 2007E 2008E 2007E 2008E
Colgate 379.9 27.12 32.43 24.20 27.0% 1.20 3.90 3.43 23.78 18.93HLL* 235.9 20.73 30.76 27.97 16.9% 1.82 4.28 3.86 28.54 24.65Dabur* 524.0 7.04 23.82 19.63 30.6% 0.78 2.18 1.90 14.49 12.51Nestle* 147.9 19.91 30.81 25.50 23.8% 1.29 4.04 3.51 26.77 22.63Marico* 1,093.5 19.52 30.77 24.78 17.3% 1.78 3.78 3.38 19.05 16.05Industry Average 16.80 29.04 24.47 1.42 3.57 3.16 22.21 18.96
Source: Company Data, Analyst Reports, Team Estimates * Consensus Data
Colgate is trading at 19x FY08 EBITDA value, which is equivalent to the industry
average. The Enterprise/Book Value for the company stands at 27. However, this
multiple would not be appropriate to value to FMCG sector, as most of the value is
derived from the brands owned (intangible asset) by the companies, which are not
accounted for in the balance sheets of the companies
FINANCIAL ANALYSIS
Quarterly Trends and Outlook Colgate-Palmolive has had a good year so far. Aided by price hikes and successful new
launches, the topline grew by 17.4% (y-o-y) in the first half of FY07. The operating profit
margin has increased by over 180 basis points in H1’07, vis-à-vis last year. The margins
have increased due to excise duty benefits and lower advertising and promotion spending
Topline Growth
The company has achieved double digit topline growth in the last 5 quarters. This has
been fuelled by successive 4% price hikes at the beginning of FY06 and FY07. Further,
toothpaste and toothbrush sales have shown high volume growth.
The first half of FY2007 saw a sale growth of 17.4%, with growth touching 20% in the
first quarter. Volume growth was experienced in all the oral care segments. The
toothbrush category grew by over 26%, increasing shift towards toothpaste segment.
Colgate being the market leader is expected to be the biggest beneficiary. The company is
expected to maintain its strong growth in the 2nd half of the year
Colgate: Value Growth by Category (YoY %)
Source: Company Data, Team Estimates
2006 2007-10.0%
0.0%
10.0%
20.0%
30.0%
40.0%
50.0%
60.0%
Q1 Q2 Q3 Q4 Q1 Q2 Q3E Q4E
Toothpaste Toothpowder Toothbrush Total
Cost Analysis
• The company has experienced a decrease in material costs (as % of net sales) due
to price hikes, over the last 6 quarters. The costs are expected to be stable in the
2nd half of FY2007
• Staff costs for the company have increased, due to increased training costs at the
Baddi plant. However, going forward, the costs are expected to come down
• In the 2nd quarter, the company paid VRS to its employees in the Sewri plant in
Mumbai. All the 263 employees accepted the VRS, entailing an outgo of Rs.
588mn (Rs.273.6mn net of tax). However, the company is expected to benefit
from lower staff costs in the future
• The advertising & promotion spend (A&P) has fallen by 550 basis points in Q2
over Q2’FY06. Lack of new product launches caused a lower spending. In the
coming two quarters, the A&P spending is expected to return to the median levels
• The overheads increased sharply in H1 over last year due to increased power and
freight costs incurred due to scaling up of operations at the Baddi plant in HP.
Now with the plant operating at full capacity, the overheads are expected to
remain at high levels in the 2nd half of the FY2007
Colgate: Cost Analysis (as % of net sales)
Source: Company Data, Team Estimates
2006 2007
48.3%
7.8%
17.7%
10.1%
46.8%
7.9%
18.5%
11.2%
40.7%
8.7%
14.4%
11.3%
44.3%
6.4%
19.7%
14.4%
43.8%
8.7%
18.3%
16.3%
43.5%
9.3%
13.0%
15.2%
43.6%
8.3%
15.6%
15.7%
43.6%
8.3%
15.6%
15.7%
0%
20%
40%
60%
80%
100%
Q1 Q2 Q3 Q4 Q1 Q2 Q3E Q4E
Raw Materials Staff A&P Overheads
Profit Analysis
The company has experienced a growth in margins, due to excise benefits and better
price realizations. In Q2, the EBIT has increased by 340 basis points over the comparable
period last year. Lower advertisement expenses (550bps), raw material cost (270bps) and
reduced outsourcing (60bps) contributed to the margin expansion. A sharp rise in
overheads (340bps) restricted further margin expansion though
Colgate: Margin & Sales Evolution
Annual Forecasts
Growing Volumes & Pricing Issues
Colgate is expected to grow due to increasing industry volume growth, better price
realizations and expected market share gains due to new launches.
Growing Volumes
• The toothpaste, toothbrush and the shaving cream industry are forecasted to
achieve good volume growth.
• In the toothpaste segment, the company is expected to grow on the back of
successful product launches. The new launches - Colgate Advanced Whitening
and Colgate Active Salt and New Colgate Max Fresh, have gained a 4% share in
the market
-
500.0
1,000.0
1,500.0
2,000.0
2,500.0
3,000.0
3,500.0
4,000.0
Q1'06 Q2'06 Q3'06 Q4'06 Q1'07 Q2'07 Q3E'07 Q4E'070.0%
5.0%
10.0%
15.0%
20.0%
25.0%
30.0%
Net SalesEBITDA Margin
• The company is expected to gain market share on the back of successful launch of
new products, thus driving the volumes
• After a negative growth, the toothpowder segment is expected to maintain low but
positive growth. This is due to the successful re-launch of the Colgate Red
toothpowder
Better Price Realizations & Rise of Private labels
Colgate increased the prices of its toothpastes by 4% in the beginning of FY2006 and
FY2007. Due to good demand growth and better positioning, we believe that the
company would be able to sustain these annual price hikes, although at a decreasing
level. Small price hikes are also expected in the toothbrush and powder category
However, going forward, the company is expected to face increased competitive
pressures, due to emergence of private labels. Retailing in India is expected to undergo a
major change with the entry of major players such as Reliance and Bharti - Wal-Mart and
scaling up of incumbent players such as Pantaloons, Trent, and Shoppers’ Stop. The share
of organized players in the USD 210bn retail industry is expected to increase from the
current 3% to 10% by 2010E.
According to an AC Nielsen study on private labels of 80 categories across 38 countries,
most of them from Europe, in 2005, “retailers tend to create powerful brands that meet
consumers’ needs” and hence, grab a significant pie of the market.
Value Shares of private labels by category (%)
Colgate: Contribution to Sales growth - By category
Source: Team Estimates
Excise & Tax Benefits
The company has been able to get major tax and excise benefits as it has shifted major
part of its toothpaste production to Baddi, a tax free zone in Himachal. The company set
up the Baddi plant at a cost of Rs. 105 crore, and the plant started production in April
2005. In FY2006, the plant ran at 2/3rd of its 24,000 tonnes capacity. The benefits \of the
plant are as follows:
• Excise Benefits: No excise duty for the first 10 years of operation. The company
will be able to save 16% excise duty charged on the toothpaste (duty is charged
after a 35% abatement on the MRP)
• Tax Benefits: 100% income tax will be exempt for the first five years. 30%
income tax will be exempt in the subsequent years
We expect the plant to run at full capacity in FY2007. Further, with the closing of the
Sewri plant in Mumbai, Baddi is the only toothpaste producing plant for Colgate. We
expect the company to expand capacity of the Baddi plant by 2008. We estimate that they
will enhance capacity by 50% to 36,000 tonnes. This expectation is based on company
and analyst comments.
With increased production, the company is expected to increase the excise and tax
benefits derived from the unit in the future
73.0%
47.5%69.6%
118.1%
20.6%
11.1%
-2.0%
0.0%6.4%
41.4% 32.4%
-18.1%
-20%
0%
20%
40%
60%
80%
100%
Toothpaste Toothpowder Toothbrush Shaving Cream
Market Share GainPricingIndustry Growth
Baddi Unit: Excise & Tax Benefits
FY2005 FY2006 FY2007E FY2008E FY2009E FY2010E Total Production (tn) 44514.34 49856.06 55340.22 60874.244 66231.18 72059.52 Baddi Unit (tn) 0 16000 24000 36000 36000 36000 Share (%) 0.00% 32.09% 43.37% 59.14% 54.36% 49.96% Excise as % of sales 10.07% 7.67% 6.80% 5.57% 5.89% 6.21%
Effective Tax Rate (%) 39.14% 24.83% 17.72% 12.85% 15.62% 17.65% Source: Company Data, Team Estimates
Power and Freight Costs
The shift of production to the Baddi unit, will cause a rise in the freight and power costs
for the company. However, the fiscal benefits will more than over come the rising costs
of the production from the unit
Freight and Power costs are expected to increase
Source: Company Data, Team Estimates
Rising Profits
EBITDA is expected to increase by 160 basis points from FY06 to FY10E. This is
because of lower excise and better price realizations, expected in the future. The PAT
will also rise by 260 basis points during the same year, due to lower tax outgo.
-
50.00
100.00
150.00
200.00
250.00
300.00
350.00
400.00
450.00
2005 2006 2007 2008 2009 2010
Power & FuelFreight
Profits are expected to rise
Source: Company Data, Team Estimates
PROJECTED FINANCIALS
Projected Income Statement (in Rs mn)
Colgate FY 06 FY 07E FY 08E FY 09E FY 10E Toothpaste 8766.00 10130.88 11473.94 12737.85 14002.33 Toothpowder 1704.50 1829.02 1888.02 1918.30 1949.05 Toothbrush 1095.75 1344.95 1540.21 1659.53 1788.09 Shaving Cream 401.78 451.08 529.23 653.60 807.20 Others 206.98 227.67 250.44 275.48 303.03 Gross Sales 12175.00 13983.60 15681.86 17244.76 18849.71 Excise 933.18 950.97 873.19 1016.18 1170.31 Net Sales 11241.90 13032.63 14808.66 16228.58 17679.40 Raw Mat 5053.60 5682.23 6232.51 6760.70 7342.43 Staff 864.47 1133.84 1225.42 1342.91 1462.97 Advert Spend 1978.00 2033.09 2421.22 2653.37 2890.58 Others 1402.84 2046.12 2244.28 2434.47 2643.95 EBITDA 1942.99 2137.35 2685.24 3037.11 3339.46 Depreciation 314.27 314.27 347.60 347.60 347.60 Other Income 256.10 171.90 171.90 171.90 171.90 EBIT 1884.82 1994.98 2509.54 2861.41 3163.76 Interest 6.00 6.00 6.00 6.00 6.00 PBT 1878.82 1988.98 2503.54 2855.41 3157.76 Tax 502.81 395.94 368.89 497.72 613.71 PAT 1376.01 1593.04 2134.64 2357.69 2544.05 Extraordinary Items 51.70 0.00 0.00 0.00 0.00 Adjusted PAT 1324.31 1593.04 2134.64 2357.69 2544.05 Dividends 1162.99 1398.98 1874.61 2070.49 2234.15 EPS 9.74 11.71 15.70 17.34 18.71
Source: Team Estimates, Company Data
10.00%
11.00%
12.00%
13.00%
14.00%
15.00%
16.00%
17.00%
18.00%
19.00%
20.00%
FY2006 FY2007E FY2008E FY2009E FY2010E
EBITDAPAT
Projected Balance Sheet (in Rs mn)
FY 06 FY 07E FY 08E FY 09E FY 10E Share Capital 1359.90 1359.90 1359.90 1359.90 1359.90 Reserves 1350.80 1557.48 1830.14 2129.96 2452.48 Net Worth 2710.70 2917.38 3190.04 3489.86 3812.38 Loans 43.60 43.60 43.60 43.60 43.60 Total Liabilities 2754.30 2960.98 3233.64 3533.46 3855.98 Net Fixed Assets 1691.20 2060.43 1896.33 1732.22 1568.12 Investments 1483.40 1483.40 1483.40 1483.40 1483.40 Cash & Bank Balances 879.70 802.82 1314.57 1850.47 2416.38 Other Current Assets 2134.90 2400.46 2632.93 2856.07 3101.82 Total Current Assets 3014.60 3203.28 3947.50 4706.54 5518.20 Current Liabilities 2823.60 3174.83 3482.29 3777.41 4102.44 Provisions 687.40 687.40 687.40 687.40 687.40 Total Current Liabilities 3511.00 3862.23 4169.69 4464.81 4789.84 Net Current Assets -496.40 -658.95 -222.20 241.73 728.36 Deferred Liability (Net) 76.10 76.10 76.10 76.10 76.10 Total Assets 2754.30 2960.98 3233.63 3533.45 3855.98
Source: Team Estimates, Company Data
Projected Cash Flow Statement (in Rs mn)
Cash Flow FY 06 FY 07E FY 08E FY 09E FY 10E Pre Tax Profit 1,878.8 1,989.0 2,503.5 2,855.4 3,157.8 Depreciation 314.3 314.3 347.6 347.6 347.6 Interest Expense 5.9 6.0 6.0 6.0 6.0 Change in WC 468.3 85.7 75.0 72.0 79.3 Others (136.3) (147.3) (147.3) (147.3) (147.3)Total Tax Paid (684.8) (395.9) (368.9) (497.7) (613.7)Cash Flow from Operations 1,846.2 1,851.7 2,416.0 2,636.0 2,829.7 Capital Expenditure (428.9) (683.5) (183.5) (183.5) (183.5)Change in Investments (105.9) - - - - Interest Received 159.9 159.9 159.9 159.9 159.9 Cash Flow From Investing (374.9) (523.6) (23.6) (23.6) (23.6)Equity Raised - - - - - Debt Raised 3.8 - - - - Interest Paid (5.9) (6.0) (6.0) (6.0) (6.0)Dividend (1,151.1) (1,399.0) (1,874.6) (2,070.5) (2,234.1)Cash Flow From Financing (1,153.2) (1,405.0) (1,880.6) (2,076.5) (2,240.1)Net Change in Cash 318.05 (76.88) 511.75 535.91 565.91 FCF 1,417.27 1,168.20 2,232.46 2,452.50 2,646.15
Source: Team Estimates, Company Data
Projected Key Ratios
Ratios FY 06 FY 07E FY 08E FY 09E FY 10E ROE (%) 48.85 54.61 66.92 67.56 66.73ROCE (%) 50.12 53.96 66.17 66.86 66.10EBIT margin 16.77 15.31 16.95 17.63 17.90EBITDA margin 17.28 16.40 18.13 18.71 18.89Net margin 11.78 12.22 14.41 14.53 14.39Asset Turnover 4.08 4.40 4.58 4.59 4.58D/E 0.02 0.01 0.01 0.01 0.01
Source: Team Estimates, Company Data