June 24, 2015
Colgate Palmolive (India) Ltd. (CPIL)
RETAIL RESEARCH
Scrip Code
COLPALEQNR
Industry
FMCG
Price Chart
1-500 830.C OLGATE PALM.BSE - 23/06/15
Trend7
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CMP
Rs. 1954.6
Recommendation
Buy at CMP and add on dips to Rs. 1696-1748
Stock Note
Target
Rs. 2192
Time Horizon
1-2 quarters
We expect CPIL’s net sales growth to improve over FY15-17 led by gradual uptick in the volume growth in both toothpaste &
toothbrush, which would be driven by new capacities, improved demand environment & continued distribution expansion.
Despite tough competitive environment (toothpaste category witnessing volume decline), positive volume growth & market
share gains is encouraging and reflects CIPL’s dominant position in the oral care category. While the volume growth could be
in high single digits over the next two years, we expect the overall value growth to be supported by improved product mix
(with innovative premium product offerings).
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Stock Details
BSE Code
500830
NSE Code
COLPAL
Bloomberg
CLGT.IN
Price (Rs) on June 23, 2015
Equity Capital (Rs. Mn)
Face Value (Rs)
1954.6
136.0
1
Eq. Shares O/s (mn)
136.0
Market Cap (Rs Mn.)
265,811.9
Book Value (Rs)
Avg. Volume (52 Week)
52 wk H/L (Rs)
56.6
20,522
% Holding
Promoters
51.0
FII
17.7
Institutions
Others (incl. body corporate)
Total
8.1
23.2
100.0
Mehernosh K. Panthaki
Fundamental Research Analyst - FMCG, IT,
Midcaps
mehernosh.panthaki@hdfcsec.com
RETAIL RESEARCH
Despite the impact of phase out of excise and tax exemptions at Baddi unit (likely to have an impact of 400 bps on topline, 150
bps on Gross margins & 250 bps on OPM in FY16), we expect the operating & PAT margins to improve, led by stability / decline
in input cost, improved product mix & moderation in the Ad spends. Despite higher depreciation (due to commencement of
new toothbrush facility) & likely increase in tax rates, we expect PAT margins to also improve gradually.
Strong brand equity & innovation pipeline, focus on premiumisation, wide distribution network provides strong growth
visibility, market share gains & competitive advantage. Continued & strong support from parent (who is bullish on India’s oral
care growth story), cash rich, debt free status, consistent & healthy dividend payouts, higher return ratios could continue to
support premium valuations.
2198.5/1446
Shareholding Pattern
(As on March 31, 2015)
Despite high penetration levels in urban areas, Indian oral care market still offers good scope for growth due to low
penetration in the rural India, low per capita consumption (of toothpaste) compared to countries like US, China etc & good
scope for premiumisation. With market leadership, CPIL is well placed to capitalize on the available opportunities.
Valuing the stock at 42xFY17E EPS, we arrive at a price target of Rs. 2192. We feel investors can buy the stock in small
quantities at CMP & average it on dips to Rs. 1696-1748 (32-5-33.5xFY17E EPS) for our price target over the next 1-2 quarters.
Particulars (Rs. in Mn)
Net Sales
% Growth y-o-y
Operating Profit
% Growth y-o-y
PAT (Adjusted)
% Growth y-o-y
EPS (Fully Diluted)
PE
FY13
30841.1
17.5
6568.1
13.5
4967.5
11.3
36.5
53.5
FY14
35448.8
14.9
6640.1
1.1
4921.2
-0.9
36.2
54.0
FY15
39547.7
11.6
8222.4
23.8
5589.8
13.6
41.1
47.6
FY16E
43107.0
9.0
9566.9
16.4
6228.5
11.4
45.8
42.7
FY17E
48710.9
13.0
11230.6
17.4
7097.8
14.0
52.2
37.4
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Company Overview
From a modest start in 1937, when handcarts were used to distribute Colgate Dental Cream Toothpaste, Colgate-Palmolive
(India) (CPIL) today has one of the widest distribution networks in India – a logistical marvel that makes Colgate available in
almost 4.8 million outlets across the country. Today, Colgate is one of the best recognized brands in India. CPIL is the market
leader in the toothpaste & toothbrush segment, with a share (by volume) of 57.8% & 42.1% respectively (YTD April 2015;
56.7% & 42.4% respectively in 2014).
CPIL manufactures and sells its products in two brands, namely ‘Colgate’ & ‘Palmolive’. CPIL has presence in categories like
Oral Care, Personal Care & Household Care with Oral Care accounting for more than 90% of its total sales. In oral care, the
products include toothpaste, toothbrush, toothpowder, whitening product & mouth wash. In Personal Care the company is
into Body wash, liquid had wash, skin care, shave preps and hair care. In Household Care, the company is into surface care.
The table below gives an overview of CPIL’s product portfolio:
Product Portfolio:
Category
Oral Care
Product
Toothpaste
Toothbrush
Personal Wash
Toothpowder
Whitening products
Mouthwash
Body Wash
Household Care
Liquid Hand wash
Shave Preps
Skin Care
Hair Care
Surface Care
RETAIL RESEARCH
Brand
Colgate Dental Cream Colgate Total, Colgate Visible
White, ColgateSensitive-Pro-Relief, Colgate Sensitive,
Colgate Max Fresh, Colgate Kids ToothPaste, Colgate
Herbal, Colgate Cibaca Family Protection, Colgate
Active Salt, Colgate Active Salt Healthy White, Colgate
Maximum Cavity Protection plus Sugar Acid
Neutralizer, Colgate Active Salt Neem
Colgate 360, Colgate Sensitive, Colgate SlimSoft,
Colgate Slim Soft Charcoal, Colgate ExtraClean,
Colgate Extra-Clean Gum Care, Colgate Zig Zag,
Colgate Kids 2+
Colgate Toothpowder
Colgate Visible White
Colgate Plax
Palmolive Aroma Shower Gel - Relax, Palmolive
Thermal Spa - Firming & Massage
Palmolive Naturals Liquid Hand Wash - Family Health
Palmolive Shave Cream
Palmolive Charmis Cream
Halo Shampoo
Axion Dish Washing Paste
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CPIL generates almost 98.5% of its revenues from the domestic market, while export revenues are just 1.5%. The company’s
plants are located at Aurangabad, Maharashtra, Baddi, Himachal Pradesh, Kundaim, Goa, Sanand, Gujarat, Sricity, Andhra
Pradesh. Baddi is the largest facility, contributing ~45% to the total revenues of CPIL. Toothpaste facility at Sanand, Gujarat,
commissioned from March 2014, while toothbrush facility at Sricity, Andhra Pradesh commissioned from March 2015.
CPIL does not have any subsidiaries as on date.
In FY14, the company sold and transferred the Company’s “Global Shared Services Organization” (GSSO Division) as and by
way of a slump sale to Colgate Global Business Services Private Limited (CGBSPL), a 100% subsidiary of the Ultimate Holding
Company, Colgate-Palmolive Company (CP-USA) with effect from June 1, 2013, on a going concern basis for a total
consideration of Rs. 5,989 lacs after adjustment of relevant assets and liabilities of GSSO Division as shown under “Exceptional
Item”. CGBSPL now, provides the best in class service to CP-USA’s subsidiaries, including CP-India with greater efficiency.
Investment Rationale
Despite high penetration levels (in urban areas) Indian oral care market still offers good scope for growth
The urban penetration levels of toothpaste in India is ~92.3% (in 2014), while rural penetration is 74.1%. Despite high
penetration levels in urban markets, we feel the oral care market still offers good scope for growth. The rural penetration is
still low. Rural population accounts for ~35% toothpaste revenues for CPIL. It has been constantly increasing reach in rural
areas by various initiatives like ‘Rural vans’ (951 Colgate Rural vans in 2014 vs. 801 in 2013 and 340 in 2012). Hence, we believe
there lies a huge untapped opportunity for CPIL to increase its reach and volumes being the market leader of the segment.
Further, there are still around ~250m people who are currently not using toothpaste and frequency amongst users is once a
day. Further, the overall per capita consumption (PCC) of toothpaste in India is significantly lower at 136 gm (2014) compared
to other developing nations, China at 264 gm, Philippines at 259 gm and Brazil at 617 gm. This leaves immense scope for
growth for India’s oral care category. If India’s PCC even reaches to that of China levels, the toothpaste market size will double.
Per capita consumption of toothpaste in India has grown at CAGR of 8.5% over the past decade and assuming a CAGR of 7% it
could double over next decade and come at par with current levels in China. Another advantage in India is the pricing factor.
The selling price of toothpaste in China is double than India and three times for toothbrushes. In US, toothpaste is 3 times
costlier, while toothbrush is 13.5 times costlier compared to India. This further leaves scope for growth in the oral care
category through premiumisation. Pick up in the economic growth would improve the spending power of consumers and
could drive premiumisation at a faster pace.
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Urban & Rural Penetration of Toothpaste in India
Per Capita Consumption of toothpaste (in gms) in 2014
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Well placed to capitalize on the available opportunities
PCC has grown from 125 g three years ago to the current levels, primarily due to new users and not so much due to habitual
change (brushing twice) which provides huge headroom for growth. CPIL is working towards enhancing per capita
consumption of toothpastes in India, but the change will take place gradually. Though continued investments in Bright Smiles
Bright Futures drive, which involves distribution of dental packs and teaching oral hygiene in schools, the company has been
able to touch ~125mn children till now. With market leadership in the oral care category, CPIL is well placed to capitalize on
the available opportunities. India's oral care market is seeing an inflection in the trends of premiumisation, the share of valueadded toothpaste in Colgate's revenues went up from ~16% in FY11 to ~20% in FY15. This is entirely driven by CPIL’s global
innovations—such as 'Visible White' and 'Sugar Acid Neutraliser'—which are technically superior products addressing specific
consumer needs. Increase in penetration (especially the rural penetration), driving premiumisation, growing per capita
consumption (through increasing awareness on oral hygiene, change in consumer habits, for eg. Brushing twice a day instead
of one time) & continued focus on innovation could enable the company to improve its volume & value growth going forward.
Strong brand equity & innovation pipeline, focus on premiumisation, wide distribution network provides strong
growth visibility, market share gains & competitive advantage
Strong brand equity
CIPL has strong brand equity. Since 1976, the company has worked in close partnership with the Indian Dental Association
(IDA) to spread the message of oral hygiene to children across the country under its 'Bright Smiles, Bright Futures' Schools
Dental Education Program. This program has successfully reached more than 125 mn school children covering around 2,41,699
schools across the country since its launch. In association with IDA, over 5.5 mn free dental check-ups done in 2014. The
strong relationship and the trust of generations of consumers, trade and the dental profession built over decades of
operations in India has made Colgate a trusted household name. In 2009, Colgate-Palmolive (India) was adjudged as the Best
Value Creator (Mid Cap Category) in the 2009 Outlook Money NDTV Profits Awards. Colgate was ranked as India's #1 Most
Trusted Brand across all categories for four consecutive years from 2003 to 2007 and from 2011 to 2014 by Brand Equity's
Most Trusted Brand Survey. It is the only brand to be in the top three since the survey’s inception in 2000 (Economic times
brand equity survey). Prior to this, Colgate was also rated as the #1 brand by the A&M – MODE Annual Survey for India's Top
Brands for eight out of nine years during the period 1992 to 2001.
To build its brand, CPIL, is engaging with consumers on digital (over 3.1 MM fans on India Facebook pages). It launched
SlimSoft Charcoal on digital platform. The company is also engaging with consumers on mobile (Colgate Scholarship Offer;
over 1.5 mn call-ins). This strategy of CPIL is likely to improve consumer stickiness and strengthen its brand equity further.
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Apart from manufacturing & selling products, which are in parent’s portfolio, CPIL manufactures products specifically for
Indian consumers. Localization efforts by CPIL like launching Active Salt Healthy White Toothpaste in India, further strengthens
its brand equity.
Colgate – India’s most purchased brands
Strong innovation pipeline with continued focus on premiumisation
CPIL has been staying ahead of trends by identifying opportunities based on insights into consumer behavior and leveraging
technology, in collaboration with the parent company, to deliver innovative products across various price points and within
each sub-categories. This launch of new innovative products gathered pace post FY11. The company launched 2 new variants
of toothpaste in FY11, 3 in FY12, 3 in FY13 & 2 in FY14, while it launched 5 new variants in toothbrushes in FY11 and 3 each in
FY12, FY13 & FY14. The company’s success in delivering meaningful innovation is evident in its launches over the last two
years. In 2014, CPIL launched i) Colgate Active Salt Healthy White toothpaste which offers the benefit of ‘Yellowness removal’
from teeth and ii) Colgate Maxfresh Fresh Tea toothpaste which offers consumers a unique and exciting Tea flavor experience.
In toothbrush category, the Company introduced innovative products like: i) Colgate® Slim Soft, a toothbrush with super slim
and ultra-soft tapered bristles - 17X slimmer than ordinary end-rounded bristles; ii) Colgate Wave Gum Comfort Toothbrush
with soft curved bristles for gum comfort and effective cleaning of teeth; and iii) Re-launch of Colgate Super Flexi Toothbrush
with a new premium handle and flexi bands to reach hard-to-reach places in the mouth. In FY15, CPIL launched (1) Colgate
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Sugar Acid Neutralizer (2) Visible White Plus Shine Toothpaste, (3) Colgate Slim Soft Charcoal toothbrush, (4) Colgate Sensitive
Pro-Relief Enamel Repair and (5) Colgate Zig Zag black toothbrush.
Several of its innovations have been very successful driven by maintaining strong Professional Partnership with IDA. New
innovations currently account for 1.1% of sales and this is likely to improve going forward, as CPIL has huge pipeline of new
launches in the coming periods. Strong innovation pipeline would enable the company to benefit immensely from the urban
recovery and increasing penetration levels in level. Focus would continue to remain on Oral Care category, where it has a
dominant presence.
Over the last one to two years, the company clearly seems to have increased its focus on premiumisation to capture the
consumer up-trading & gain market share. Contribution of premium products has improved significantly from 15% in FY14 to
20% in FY15. Going forward, management expects premium mix to improve further on back of new premium launches. Higher
proportion of premium products in the portfolio would lead to consumer upgrades, margin expansion & market share gains
for CPIL.
Innovating to drive the premiumisation
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Increasing market share (by volume) in challenging environment & heightened competition reflects improved and
innovative product offerings and strong distribution network
CPIL is a market leader in oral care in India commanding a market share of 57.8% in toothpaste (highest ever) and 42.1% in
toothbrush category (YTD April 2015). Despite a very challenging environment and increasing competitive intensity over the
last two to three years, CPIL has managed to consistently strengthen its market share in both toothpaste & toothbrush, which
has increased from 54.5% & 39.8% respectively in 2012. CPIL’s continuous innovative launches, strong distribution network,
aggressive field marketing efforts and long presence in the Indian oral care market has enabled the company to consistently
gain volume & value market share and outperform its peers. CPIL’s market share continued to improve despite intensifying
competition with Procter & Gamble’s (P&G) re-entry into the toothpaste segment in India in June, 2013 (brand: Oral B). CPIL
responded by massively increasing its A&P spends from 15.5% of sales in FY13 to 19.2% of sales in FY14 which impacted its
margins, but the company managed to improve its market share. Also, the second largest player in the toothpaste category,
HUL, has been losing its market share over the last two years from 18.8% in 2012 to 18.3% in 2015 (YTD). Dabur India has
managed to hold its share in the last two years. Further, regional players like Vicco, Ajanta, Anchor, Smyle & Baidyanath have
also witnessed a loss in market share in toothpastes. The overall market share of all these regional brands has declined to ~2%
in 2013 from more than 5% in 2011 and ~15% share in 2003.
The competition intensified with P&G’s foray in toothpaste category with Oral-B brand in July, 2013.
However, there is a strong chance that over long term, Colgate should see its A&P spends stabilize at its historical levels and
that would give big boost to its margins.
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Increasing market share in challenging environment & heightened competitive clearly reflects improved and innovative
product offerings across various price points and strong distribution network. Today, Colgate is available in almost 4.8 mn
outlets across the country. The company has been constantly increasing reach in rural areas by various initiatives like Colgate
‘Rural vans’, which have increased from 340 in 2012 to 951 in 2014. The village coverage has increased from 22000 in 2012
(with the help of 353 rural distributor representatives) to 54000 in 2014 (1372 distributor representatives). This we, feel would
increase going forward since the rural penetration is still low and offers scope for healthy growth. We feel CPIL’s strong
innovation pipeline with increasing focus on premiumisation & distribution expansion would enable the company to maintain
its market leadership in the oral care category going forward. The company is likely to be a major beneficiary of the urban
recovery (consumer upgrades) and increasing penetration levels in rural India and would have an edge over its peers
Unlike its peers, CPIL’s mainstay is oral care which contributes to 90%+ of its total India revenues while the corresponding
contribution for HUL, P&G & Dabur is a meager 6%, ~2%, and 9% respectively. Hence, CPIL’s competitors in India could find it
difficult to match CPIL’s A&P budgets for this category going forward.
Market Share in Toothpaste
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Market Share in Toothbrush
Strong parental support
Founded in 1806, Colgate-Palmolive Company is a $17.3 billion global company serving 37000 Colgate people worlwide in
more than 223 countries. Its organic sales have grown at a CAGR of ~5.9% over 2007-2014 with Asia growing at a faster rate.
The Company focuses on strong global brands in its core businesses – Oral Care [46% of global sales], Personal Care [21% of
global sales], Home Care [20% of global sales] and Pet Nutrition [13% of global sales]. Its brands include Colgate, Suavitel, Ajax,
Mennen, Sanex, Palmolive, Hills, Axion, Protex & Softsoap. In oral care, the company is a market leader in toothpaste
(worldwide - 44.4% market share in 2014; 45.2% YTD) and has a strong position in manual toothbrushes (33.4% market share;
33.8% YTD) and mouthwash (16.8%; 16.4% YTD). Worldwide market leadership gap between Colgate and other global peers in
toothpaste & toothbrushes remains huge (nearest competitor has market share of 14.4% in toothpaste and 20.8% share in
manual toothbrush worldwide). Across Asia, the company is also a very large player in the non-oral care category. It is No. 1
across Asia in Liquid Hand soap, fabric conditioner and household cleaner and No. 2 in bar soap, liquid body cleansing and
hand dishwashing. The company derives 47% of its revenues from Americas, 18% from Europe / South Pacific, 16% from Asia,
6% from Africa / Eurasia & 13% revenues come from Hill’s Pet Nutrition.
CPIL has been staying ahead of trends by identifying opportunities based on insights into consumer behavior and leveraging
technology, in collaboration with the parent company, to deliver innovative products. The parent company sees a lot of scope
for growth in the oral care market in India going forward, as the rural penetration is still low and there are around ~250 mn
people not using toothpaste and the frequency amongst the users is once a day, which offers immense headroom for growth.
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Per capita consumption is half that of China and average selling price of toothpaste is also half that of China, which offers
scope for premiumisation. Hence we feel the parent will continue to invest in India with innovative product offerings through
CPIL, which is its only Indian FMCG subsidiary in India. Premiumization of portfolio would be its key focus. In Brazil, the
premium segment grew sharply from 30% in 2004 to 57% in 2014. We believe that premiumisation happening in India
(currently 20%, up from 15% in FY14) is also a huge growth story for the next 10-15 years, similar to its BRICs peers.
Apart from the oral care category, non-oral care is a huge opportunity in India for the parent company in the long run, given
the fact that this segment accounts for only ~3% of sales in India currently & existing distribution reach of ~5mn outlets. While
in the immediate term, the focus would be on oral care, the non-oral care area could also be targeted for growth in future,
considering the parents large presence in that category.
Greenfield toothbrush & toothpaste facilities to boost the turnover & profits
In order to cater to the increasing demand for oral care products & to maintain its growth momentum, CPIL has set up a state
of the art toothpaste manufacturing facility at Sanand in Gujarat which was commissioned in March 2014. Similarly, the
company has invested in setting up a new Toothbrush manufacturing facility at Sricity in Chittoor District in Andhra Pradesh.
The company has incurred CAPEX of Rs. 4000 mn in FY15 (funding through internal accruals). The commercial production of
Toothbrush facility, which would have an installed capacity to produce 220 mn pieces has commenced in March, 2015. These
greenfield facility would ensure that company is able to meet its demand from consumers and would boost its turnover &
profits. Also this would result in gradual reduction in outsourcing and increase the proportion of in-house manufacturing,
which could aid in margin expansion.
Open offer to CPIL shareholders by parent company to increase its stake is a possibility going forward
CPIL’s parent, Colgate-Palmolive USA currently owns 51% stake in CPIL. India is a key geography for the parent in terms of
revenue & profit growth. While India accounts for ~3-4% of revenue and net profits, the Indian entity’s oral care segment
accounts for ~7-8% of global oral care sales. Citing strong growth potential in India, there is a possibility an open offer to CPIL’s
shareholders from the parent company to increase its stake in CIPL. While this is not a priority or focus area, it could happen in
the long run. In the past we have seen open offers from MNCs like HUL & GlaxoSmithKline Consumer Healthcare. Delisting
looks unlikely in the medium term, as it could prove to be a costly affair with the parent’s stake at only 51%.
Open offer (whenever it happens) could be at a healthy premium to the then prevailing market price. The open offers from
GSK Consumer & HUL were at 28% and 20% premium respectively to their respectively prevailing market prices.
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Sales growth to improve over FY15-17 led by gradual uptick in volume growth & improved product mix
CPIL’s net sales have grown by 14.7% on CAGR basis over FY12-15. The volume growth in Toothpaste has moderated from mid
to low double digits during FY12, FY13 & FY14 to mid single digits (5.5%) in FY15. This was due to overall slowdown in the
category growth (which is witnessing volume decline). However, despite tough competitive environment, positive volume
growth & market share gains is encouraging and reflects CIPL’s dominant position in the oral care category. Rural demand has
been better than urban demand recently & decline in industry volumes is reducing, which indicates recovery in the coming
quarters.
We expect the sales growth to improve over FY15-17 led by gradual uptick in the volume growth in both toothpaste &
toothbrush, which would be driven by improved demand environment & continued distribution expansion. While the volume
growth could be in high single digits over the next two years (could improve to 6% in FY16 and to 8% in FY17), we expect the
overall value growth to be supported by improved product mix (with innovative premium product offerings). The overall sales
growth in FY16 has been projected lower at 9% (despite the expected improvement in volume growth & product mix) to factor
in the impact of phasing out of excise duty exemptions at Baddi unit (which is expected to impact the topline by 400 bps).
Growth in FY17 is estimated to improve to 13%. Incremental revenues over the next two years from the greenfield toothbrush
facility (operational from March 2015) would support the sales growth.
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Margins to improve over FY15-17, led by stability / decline in input cost, improve product mix & moderation in
the Ad spends
Despite the impact of 150 bps on gross margins & 250 bps on OPM expected due to phase out of excise exemptions at Baddi
unit, we expect CPIL’s OPM to improve by 140 bps to 22.2% in FY16, led by soft input cost (Sorbitol & Calcium Carbonate prices
are down by 5% each), improved product mix and moderation in the Ad spends. In FY17, we expect a further improvement of
86 bps to 23.1%. While we expect the competitive intensity to remain high, we feel the A&P cost / Net Sales has peaked out &
is expected to trend lower gradually (though on absolute basis it would rise) over the next two years. There is a strong chance
that over long term, CPIL should see its A&P spends stabilize at its historical levels, which could give boost to its margins.
Though we expect the PAT margins to improve, it would be gradual (by 31 bps to 14.4% in FY16 & by 12 bps to 14.6% in FY17)
and lower than in line with OPM improvement on the back of expected increase in the tax rates over the next two years
(estimated to be 31% in FY16 & 33% in FY17) due to phase out of tax exemption at Baddi unit and higher depreciation cost
(due to commencement of new Toothbrush facility at Sricity from March 2015).
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Cash rich, debt free status, consistent & healthy dividend payouts, higher return ratios could continue to support
premium valuations
CPIL is a cash rich and a debt free company. Its cash & cash equivalents stood at Rs. 2.6 bn in FY15. The average operating cash
flows over the last three years stood at Rs. 5.63 bn. This ensures that the company meets its CAPEX requirements entirely
from internal accruals. The funding of the new facilities at Sanand & Sricity has also been done through internal accruals. We
expect healthy cash flow generation to continue going forward, which would enable the company to maintain its cash rich &
debt free status.
The company also has a good track record of enriching its shareholders wealth with healthy dividend payouts (in the range of
58-74% over the last five years). With steady earnings growth we expect healthy payouts to continue going forward.
CIPL also enjoys healthy return ratios with ROCE at 101.3% & RONW at 72.6% in FY15. Though we expect the return rations to
fall marginally over the next two years due to recent increasing investments in new facilities (ROCE expected to fall from
101.3% in FY15 to 94.3% by FY17 and RONW expected to fall from 72.6% in FY15 to 63.2% in FY17), they would still appear
healthy. Once the profitability accelerates, we expect them to improve going forward. Robust cash balance, NIL debt, high
return ratios & consistent & healthy dividend payouts would continue to support the premium valuations.
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Risks & Concerns
 Prolonged weakness in the Indian economy, higher inflation could impact the consumer’s spending power & impact the
demand for the company’s products (largely premium products).
 Slowdown in the rural wage growth & flat MSP crop prices could result in down trading by consumers.
 Baddi unit (~45% of revenues) is likely to witness phasing out of excise and tax exemptions in FY16. The increase in the
excise exemptions will impact net sales by 400bps, gross margin by 150bps and EBITDA by 250bps. Further, the tax rate is
likely to increase to 30-31% in FY16 & 34% in FY17. This could put pressure on the bottomline growth.
 Sharp rise in the input cost (sorbital, calcium carbonate, tubes and containers, oils, cartons, etc) could impact the volume
growth (in the event company passes the cost increase to consumers) in a challenging environment or margins (if the
company does not pass on / partly passes on the price increase).
 Though the company does not have any immediate plans to hike the royalty paid to the parent company (5% on domestic
sales, 8% on exports and 1% on toothpowder), any such step could impact its profitability.
 Increase in the competitive intensity from cash rich companies like P&G (Oral-B), HUL (Pepsodent) and Dabur (Red
Toothpaste, Babool) could result in higher A&P spends and impact the margins. Pricing war from these players could result
in loss in the market share for Colgate in the oral care category.
 If customers don’t adopt to premium products as per company’s expectations, then the margin expansion might not
happen to the extent expected.
 CPIL imports 21.6% of its total material requirements. Continued & sharp depreciation of INR could increase cost of
imported chemicals.
 Modern retail is likely to be a key growth driver for CPIL, particularly in the premium product category. The company sells
to the general trade (~85% of sales) on cash basis, while modern trade players (~10% of sales) have 20-day credit period
and the government’s CSD (~5% of sales) enjoys credit period of close to a month. As the share of modern trade to overall
sales will increase, CPIL’s working capital cycle (WCC) could deteriorate from the current impressive level (negative 15
days). The parent has NWC days of around 1 month.
Conclusion
We expect CPIL’s net sales growth to improve over FY15-17 led by gradual uptick in the volume growth in both toothpaste &
toothbrush, which would be driven by improved demand environment & continued distribution expansion. Despite tough
competitive environment (toothpaste category witnessing volume decline), positive volume growth & market share gains is
encouraging and reflects CIPL’s dominant position in the oral care category. Rural demand has been better than urban
demand recently & decline in industry volumes is reducing, which indicates recovery in the coming quarters.
While the volume growth could be in high single digits over the next two years (could improve to 6% in FY16 and to 8% in
FY17), we expect the overall value growth to be supported by improved product mix (with innovative premium product
offerings). The overall sales growth in FY16 has been projected lower at 9% (despite the expected improvement in volume
RETAIL RESEARCH
Page | 15
growth & product mix) to factor in the impact of phasing out of excise duty exemptions at Baddi unit (which is expected to
impact the topline by 400 bps). Growth in FY17 is estimated to improve to 13%. Incremental revenues over the next two years
from the Greenfield toothbrush facility (operational from March 2015) would support the sales growth.
Despite high penetration levels in urban areas, Indian oral care market still offers good scope for growth due to low
penetration in the rural India, low per capita consumption (of toothpaste) compared to countries like US, China etc & good
scope for premiumisation. With market leadership, CPIL is well placed to capitalize on the available opportunities.
Strong brand equity & innovation pipeline, focus on premiumisation, wide distribution network provides strong growth
visibility, market share gains & competitive advantage. CPIL’s market share has continued to improve despite P&G re-entry
into the toothpaste segment in India in June, 2013 (brand: Oral B). Also, the second largest player in the toothpaste category,
HUL, has been losing its market share over the last two years. Further, regional players like Vicco, Ajanta, Anchor, Smyle &
Baidyanath have also witnessed a loss in market share in toothpastes.
Despite the impact of phase out of excise and tax exemptions at Baddi unit (likely to have an impact of 150 bps on Gross
margins & 250 bps on OPM), we expect the operating & PAT margins to improve, led by stability / decline in input cost,
improve product mix & moderation in the Ad spends. Despite higher depreciation (due to commencement of new toothbrush
facility) & likely increase in tax rates, we expect PAT margins to also improve gradually.
At CMP, CPIL trades at 37.5xFY17E EPS, which is at a premium to its average historical valuation. The stock has traded in one
year forward PE band of 32-44x. Strong brand equity, continued & strong support from parent (who is bullish on growth of
India’s oral care category and would continue to make investments in the form of innovative product offerings), cash rich, debt
free status, consistent & healthy dividend payouts, higher return ratios could continue to support premium valuations.
Further, though a probability of an open offer from the parent to increase its stake from current 51% looks low at present, any
progress on the same in future could be a positive trigger for the stock.
Valuing the stock at 42xFY17E EPS, we arrive at a price target of Rs. 2192. We feel investors can buy the stock in small
quantities at CMP & average it on dips to Rs. 1696-1748 (32-5-33.5xFY17E EPS) for our price target over the next 1-2 quarters.
RETAIL RESEARCH
Page | 16
Quarterly Financials
Particulars
Net Sales
Other Operating Income
Other Income
Total Income
Total Expenditure
Raw Material Consumed
Stock Adjustment
Employee Expenses
Other Expenses
PBIDT
Interest
PBDT
Depreciation
PBT
Tax (incl. DT & FBT)
Reported Profit After Tax
Extra-ordinary Items/ Minority Interest
Adj. Profit After Extra-ord. item
EPS (Rs.)
Equity
Face Value
OPM (%)
PATM (%)
Q4FY15
10220.0
65.1
71.4
10356.5
7810.4
3739.4
-1.7
663.4
3409.3
2546.1
0.0
2546.1
204.6
2341.5
705.2
1636.3
0.0
1636.3
12.0
136.0
1.0
24.2
16.0
Q4FY14
9205.9
66.9
-22.1
9250.7
7254.1
3607.5
51.4
433.8
3161.4
1996.6
0.0
1996.6
153.0
1843.6
520.6
1323.0
-44.1
1367.1
10.1
136.0
1.0
21.9
14.9
VAR [%]
11.0
-2.7
-423.1
12.0
7.7
3.7
-103.3
52.9
7.8
27.5
27.5
33.7
27.0
35.5
23.7
-100.0
19.7
19.7
0.0
0.0
Q3FY15
9885.6
74.5
96.6
10056.7
8014.1
3676.3
-39.0
661.1
3715.7
2042.6
0.0
2042.6
202.8
1839.8
531.2
1308.6
0.0
1308.6
9.6
136.0
1.0
19.7
13.2
VAR [%]
3.4
-12.6
-26.1
3.0
-2.5
1.7
-95.6
0.3
-8.2
24.6
24.6
0.9
27.3
32.8
25.0
25.0
25.0
0.0
0.0
Q2FY15
9935.7
69.5
99.2
10104.4
8140.1
3846.7
-116.9
680.9
3729.4
1964.3
0.0
1964.3
177.3
1787.0
491.2
1295.8
0.0
1295.8
9.5
136.0
1.0
18.8
13.0
Q1FY15
9506.4
62.6
64.5
9633.5
7632.4
3578.2
-5.9
583.9
3476.2
2001.1
0.0
2001.1
165.5
1835.6
486.5
1349.1
0.0
1349.1
9.9
136.0
1.0
20.4
14.2
(Source: Company, HDFC Sec)
Financial Estimates
Profit & Loss A/c
YE March (Rs. Mn.)
Net Sales
Other Operating Income
Total Operating Income
Material Cost
Employee Benefits Expenses
RETAIL RESEARCH
FY13
30841.1
797.0
31638.1
12501.9
2494.4
FY14
35448.8
339.3
35788.1
14020.2
2117.8
FY15
39547.7
271.7
39819.4
14677.1
2589.3
FY16E
43107.0
298.9
43405.9
15626.3
2909.7
FY17E
48710.9
343.7
49054.6
17438.5
3336.7
Page | 17
Advertisement & Sales Promotion
Other Expenditure
Total Operating Expenses
Operating Profit
Other Income
EBITDA
Interest
Depreciation
PBT
Tax (including FBT & DT)
PAT (before minority interest
Minority Interest
Reported PAT
Extra-ord. Items
Adjusted PAT
3545.9
6527.8
25070.0
6568.1
499.2
7067.3
0.0
437.0
6630.3
1662.8
4967.5
0.0
4967.5
0.0
4967.5
6886.5
6123.5
29148.0
6640.1
1147.0
7787.1
0.0
507.5
7279.6
1880.9
5398.7
0.0
5398.7
477.5
4921.2
7142.5
7188.1
31597.0
8222.4
331.7
8554.1
0.0
750.2
7803.9
2214.1
5589.8
0.0
5589.8
0.0
5589.8
7543.7
7759.3
33839.0
9566.9
364.9
9931.7
0.0
904.9
9026.8
2798.3
6228.5
0.0
6228.5
0.0
6228.5
8402.6
8646.2
37824.0
11230.6
419.6
11650.2
0.0
1056.5
10593.7
3495.9
7097.8
0.0
7097.8
0.0
7097.8
(Source: Company, HDFC Sec Estimates)
Balance Sheet
YE March (Rs. Mn.)
Equity & Liabilities
Shareholders’ Funds
Share Capital
Reserves & Surplus
FY13
FY14
FY15
FY16E
FY17E
4895.9
136.0
4759.9
5998.8
136.0
5862.8
7703.2
136.0
7567.2
9362.3
136.0
9226.4
11238.0
136.0
11102.0
357.4
0.0
0.0
0.0
8.4
349.0
256.1
0.0
0.0
0.0
7.5
248.6
649.9
0.0
0.0
25.9
15.4
608.6
532.2
0.0
0.0
28.5
16.8
486.9
562.4
0.0
0.0
32.2
19.0
511.2
Current Liabilities
Short Term Borrowings
Trade Payables
Other Current Liabilities
Short Term Provisions
7814.4
0.0
4666.2
2501.8
646.4
8632.7
0.0
5099.7
2829.4
703.6
8665.9
0.0
5144.0
2858.7
663.2
9365.8
0.0
5555.5
3087.4
722.9
10450.6
0.0
6166.6
3488.8
795.2
Total Equity & Liabilities
13067.8
14887.5
17019.0
19260.3
22251.0
Non-Current Liabilities
Minority Interest
Long Term borrowings
Deferred Tax Liabilities (Net)
Other Long Term Liabilities
Long Term Provisions
RETAIL RESEARCH
Page | 18
Assets
Non-Current Assets
Fixed Assets
Gross Block
Depreciation
Net Block (Tangible Assets)
Intangible Assets
Capital Work-in-Progress
Goodwill On Consolidation
Non Current Investments
Deferred Tax Asset
Long -term Loans and Advances
Other Non-Current Assets (including Deferred Tax Asset)
5137.4
3826.2
5828.8
3022.1
2806.6
0.0
1019.6
0.0
371.3
224.4
703.0
12.5
8169.5
6974.1
9020.3
3461.3
5559.1
0.0
1415.1
0.0
371.3
177.8
625.6
20.6
10121.8
9227.7
12439.2
4211.5
8227.7
0.0
1000.0
0.0
301.3
0.0
555.4
37.4
10770.6
9822.8
14139.2
5116.4
9022.8
0.0
800.0
0.0
301.3
0.0
605.4
41.1
11998.2
10966.3
16379.2
6172.8
10206.3
0.0
760.0
0.0
301.3
0.0
684.1
46.5
Current Assets
Current Investments
Inventories
Trade Receivables
Cash & Cash Equivalents
Short Term Loans & Advances
Other Current Assets
7930.4
99.8
1853.0
812.1
4288.0
844.7
32.8
6718.0
0.0
2257.4
547.3
2869.5
1027.0
16.7
6897.2
70.0
2522.3
696.4
2544.5
1029.9
34.1
8489.7
70.0
2749.3
773.0
3725.3
1132.9
39.2
10252.7
70.0
3106.7
881.2
4847.7
1302.8
44.3
13067.8
14887.5
17019.0
19260.3
22251.0
Total Assets
(Source: Company, HDFC Sec Estimates)
Key Ratios
YE March
FD EPS (Rs.)
PE (x)
Book Value (Rs.)
P/BV (x)
OPM (%)
PBT (%)
NPM (%)
ROCE (%)
RONW (%)
Debt-Equity (x)
Current Ratio (x)
RETAIL RESEARCH
FY12
36.5
53.6
36.0
54.4
21.3
21.5
16.1
135.4
101.5
0.0
1.0
FY13
36.2
54.1
44.1
44.4
18.7
20.5
13.9
121.4
82.0
0.0
0.8
FY14
41.1
47.7
56.6
34.6
20.8
19.7
14.1
101.3
72.6
0.0
0.8
FY15E
45.8
42.8
68.8
28.5
22.2
20.9
14.4
96.4
66.5
0.0
0.9
FY16E
52.2
37.5
82.6
23.7
23.1
21.7
14.6
94.3
63.2
0.0
1.0
Page | 19
Mkt. Cap / Sales (x)
8.6
37.1
EV/EBITDA (x)
7.5
33.8
6.7
30.8
6.2
26.4
5.5
22.4
(Source: Company, HDFC Sec Estimates)
Cash Flow
YE March
Profit Before Tax
Net Opt Cash Flow
Net Cash from Investing Activities
Net Cash from Financing Activities
Cash & Cash Equivalents
Net Inc/(Dec) in Cash
FY12
6630.3
6149.0
858.5
-4276.0
4288.0
2731.5
FY13
7279.6
4573.8
-1771.5
-4220.7
2869.5
-1418.4
FY14
7803.9
6174.0
-2950.4
-3548.6
2544.5
-325.0
FY15E
9026.8
7424.2
-1553.7
-4689.7
3725.3
1180.8
FY16E
10593.7
8602.1
-2284.0
-5195.6
4847.7
1122.4
(Source: Company, HDFC Sec Estimates)
1 year closing price chart
1-500830.C OLGATE PALM.BSE - 23/06/15
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RETAIL RESEARCH Tel: (022) 3075 3400 Fax: (022) 2496 5066 Corporate Office
HDFC securities Limited, I Think Techno Campus, Building - B, "Alpha", Office Floor 8, Near Kanjurmarg Station, Opp. Crompton Greaves, Kanjurmarg (East), Mumbai 400 042 Phone: (022) 3075 3400 Fax:
(022) 2496 5066 Website: www.hdfcsec.com Email: hdfcsecretailresearch@hdfcsec.com
Disclaimer: This document has been prepared by HDFC Securities Limited and is meant for sole use by the recipient and not for circulation. This document is not to be reported or copied or made available to
others. It should not be considered to be taken as an offer to sell or a solicitation to buy any security. The information contained herein is from sources believed reliable. We do not represent that it is accurate or
complete and it should not be relied upon as such. We may have from time to time positions or options on, and buy and sell securities referred to herein. We may from time to time solicit from, or perform
investment banking, or other services for, any company mentioned in this document. This report is intended for non-Institutional Clients
This report has been prepared by the Retail Research team of HDFC Securities Ltd. The views, opinions, estimates, ratings, target price, entry prices and/or other parameters mentioned in this document may or
may not match or may be contrary with those of the other Research teams (Institutional, PCG) of HDFC Securities Ltd.
Disclosure by Research Analyst: Research Analyst or his relative or HDFC Securities Ltd. does not have any financial interest in the subject company. Also Research Analyst or his relative or HDFC Securities
Ltd. or its Associate does not have beneficial ownership of 1% or more in the subject company at the end of the month immediately preceding the date of publication of the Research Report. Further Research
Analyst or his relative or HDFC Securities Ltd. or its associate does not have any material conflict of interest. Any holding in stock - No
Disclosure by Research Entity: HDFC Securities Ltd. may have received any compensation/benefits from the subject company, may have managed public offering of securities for the subject company in the
past 12 months. Further, Associates of the Company may have financial interest from the subject company in the normal course of Business. The subject company may have been our client during twelve months
preceding the date of distribution of the Research report. Research analyst has not served as an officer, director or employee of the subject company. Research entity has not been engaged in market making
activity for the subject company. We have not received any compensation/benefits from the subject company or third party in connection with the Research Report.
RETAIL RESEARCH
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