• Colgate recorded 14.7% yoy growth in revenues at Rs8.4bn during Q1 FY14 – marginally below our expectations of Rs8.6bn. Colgate reported a healthy 9% yoy volume growth led by toothpaste brands like Colgate Dental Cream, Active Salt, Colgate Max Fresh and Colgate Total. Core toothpaste segment witnessed healthy 11% yoy volume growth led by the flagship brands. According to company management, premiumisation trend has been witnessed – for e.g. the freshness category sales increased by 18% yoy for FY13 (premiumisation adds ~2-3% to Colgate’ sales each year).
  
  
• Colgate has witnessed significant volume market share gains of 120bps yoy at 55.9% in toothpaste category during Jan-Jun13. Market share in the toothbrush segment increased sharply by 270bps to 41.5% during Jan-Jun’13.
  
  
• Operating margins for the quarter contracted by 160bps to 17.8% due to sharp 390bps/60bps increase in overhead (higher power & fuel cost) /advertising (higher competitive activity) cost respectively. We believe with the recent Oral B launch and increasing competition in the oral care sector, requirement of higher adspends will keep Colgate’s operating margins under check.

• Effective tax rate for the quarter was higher at 32.9% against 28% in Q1 FY13. The company expects tax rate to increase by ~150bps per year, as a larger proportion of its production comes from non-tax exempt zone. The company recorded an exceptional Rs555mn (net of tax) gain from slump sale of Global Shared Services Organisation to Colgate-Palmolive Company, USA. Adjusted net profit for the quarter increased by 11.5% yoy to Rs1.3bn - above our estimates.

• Colgate continues to dominate the oral care industry despite stiff competition from players like HUL and Dabur. We expect the competitive activity to intensify further (HUL, P&G and GSK Consumer) resulting in higher adspend for gaining/protecting market share. Higher adspend and tax outgo (higher production from non-tax free zone) are likely to put pressure on profitability. We expect Colgate to witness ~16% CAGR in revenues and net profit respectively over FY13-15. At the current market price of Rs1,349, the stock is trading at 27.2x FY15E EPS of Rs49.6. Maintain Market Performer rating with a revised 9-mth price target of Rs1,438 (earlier Rs1,523).

Results table