Colgate recorded 13.9% yoy growth in revenues at Rs7.6bn during Q3 FY13 – marginally lower than our expecations of Rs7.9bn. Volume growth remained strong at 8% yoy (9% during 9M FY13) led by toothpaste brands like Colgate Dental Cream, Active Salt, Colgate Max Fresh and Colgate Total. Core toothpaste segment witnessed healthy 8% yoy (10% during 9M FY13) volume growth led by the flagship brands. Though the volume growth has come off in the last few quarters, the management believes that it is not witnessing any material slowdown and expects volume growth to be in a similar band.
Colgate has witnessed significant market share gains of 180bps yoy in toothpaste category during Jan-Dec’12. Colgate has maintained leadership position by registering volume market share of 54.2% during Jan-Dec’12 (52.4% during Jan-Dec’11) in the toothpaste category. Colgate launched new toothpastes – Colgate Total Pro Gum Health and Colgate Sensitive Pro-Relief™ Multi-Protection during the quarter. Market share in the toothbrush and mouthwash categories increased to 39.5%/26.7% respectively during Jan-Dec’12.
Operating margins for the quarter contracted by 220bps to 16.9% due to sharp 280bps increase in advertising cost (related to the Oral Health Month). A 120bps drop in overhead cost restricted further margin erosion. We expect the adspend to sales ratio to remain at ~10-11% of net sales for the next 2-3 years.
|As a % of net sales||Q3 FY13||Q3 FY12||bps yoy||Q2 FY13||bps qoq|
|Purchase of FG||7.7||8.4||(70)||7.3||42|
Effective tax rate for the quarter was higher at 26.1% against 22.2% in Q3 FY12. Net profit for the quarter declined by 3.9% yoy to Rs1.1bn - below our estimates of Rs1.4bn due to sharp increase in advertising cost and higher tax outgo.
Apart from setting up a new toothbrush facility in Sanand, Gujarat, Colgate has acquired a plot of land in Andhra Pradesh (in April 2012) on a long term lease for setting up another toothbrush manufacturing facility which is expected to be operational in CY13.
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 and GSK Consumer) resulting in higher adspend for gaining/protecting market share. Higher adspend and tax outgo (income tax benefit for Colgate’s manufacturing plant in Baddi has reduced from 100% to 30%) are likely to put pressure on profitability. We expect Colgate to witness 17.2% CAGR in revenues and 16.4% CAGR in net profit over FY12-14. At the current market price of Rs1,351, the stock is trading at 30.4x FY14E EPS of Rs44.5. Maintain Market Performer rating with a revised 9-mth price target of Rs1,423 (earlier Rs1,334).
|(Rs m)||Q3 FY13||Q3 FY12||% yoy||Q2 FY13||% qoq|
|Purchase of goods||(590)||(565)||4.5||(567)||4.2|
|OPM (%)||16.9||19.1||(219) bps||20.3||(341) bps|
|Effective tax rate (%)||26.1||22.2||-||19.4||-|
|Adj. PAT margin (%)||14.6||17.3||(270) bps||
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