Initiating Coverage November 21, 2013 Colgate Palmolive India (COLPAL) Rating Matrix | 1254 Rating : Hold Target : | 1365 Target Period : 12-15 months Potential Upside : 9% YoY Growth (%) (YoY Growth) Net Sales EBITDA Adj. PAT Adj. EPS (|) FY12 21.3 28.8 10.7 10.7 FY13 17.5 13.5 11.3 11.3 FY12 38.2 41.6 28.9 6.3 102.5 123.8 FY13 34.3 37.4 25.3 5.4 101.5 125.2 Valuation Summary P/E (x) (Adjusted) Target P/E (x) EV/EBITDA (x) Mcap/Sales (x) RoNW (%) RoCE (%) Stock Data Market Capitalization Total Debt (FY13) Cash and Investments (FY13) EV 52 week H/L Equity capital Face value MF Holding (%) FII Holding (%) Comparative return matrix (%) Return % Colgate-Palmolive (In Dabur Hindustan Unilever P&G 1M (1.1) (7.0) (4.1) 1.4 3M (0.4) 0.4 (1.5) 3.7 Price movement 6,500 6,000 5,500 5,000 Colgate-Palmolive India Ltd (CPIL) is the country’s leading oral care player with its brand ‘Colgate’ present across all categories of oral health. Over the years, CPIL has been consistently ranked among the FY14E FY15E top three trusted brands of the country and has developed brand 12.6 14.3 equity that has made the brand, Colgate, synonymous with the 5.7 23.5 toothpaste category itself. The strong volume market share (April, 5.5 18.2 2013) at 55.4% and 41.5% in toothpaste and toothbrush, respectively, 5.5 18.2 justifies the dominance it commands in the respective categories. Led by CPIL’s strong market position, the company has posted impressive revenue and PAT CAGR of 16.5% from FY08-13. We believe the oral FY14E FY15E care industry in India is poised to continue high growth led by 32.5 27.5 increasing per capita consumption, increasing penetration in rural 32.2 30.0 23.9 19.3 areas and premiumisation. However, the increasing competitive 4.8 4.2 intensity in the segment could lead to a moderation in revenue and 91.4 91.2 PAT CAGR for CPIL to 13.4% and 11.7%, respectively. We initiate 102.3 117.4 coverage on the stock with a HOLD rating. Market leadership in oral care to sustain The company’s volume market share in toothpaste at 55.4% and | 17053.5 Crore toothbrush at 41.5% is ~2x that of its nearest competitors in both | 0 Crore segments led by CPIL’s strong brand equity and an unmatched oral care | 428.8 Crore portfolio. Though HUL has been expanding its oral care portfolio to | 16624.7 Crore 1567 / 1202 match that of CPIL, it has been unable to make any significant difference | 13.6 Crore in the market leader’s share. We believe that with CPIL being proactive in | 1 innovation in sub-segments and having one of the highest distribution 6.7 reach, it would continue to grow at the same/higher pace than the oral 19.8 care industry, thereby maintaining its market dominance. Increasing penetration, per-capita consumption to aid growth Though toothpaste penetration in India has increased from 56% (2008) 6M 12M (11.6) (5.7) to 71% (2012), there are still ~30 crore people using conventional ways 0.9 27.0 of brushing. Being the market leader, this throws up a big untapped (0.8) 11.8 opportunity for CPIL. Further, with India’s per capita consumption being 8.0 13.3 abysmally low at 136 gm (FY12) compared to China at 277 gm and Brazil at 622 gm, we believe CPIL still has enough room to grow. Earnings growth to gain traction, attractively valued 2,000 Currently, the stock is trading at 27.5x its FY15E EPS of | 45.6/share, ~10% premium to its historic average. With strong growth in revenues 1,800 and earnings at 16.5% CAGR (FY08-13), dominance in oral care and 1,600 excellent return ratios, we believe this premium is justified. We have 1,400 valued CPIL on a triangulated fair value of P/E, EV/EBITDA and DCF 1,200 methodology, assigning it a target price of | 1365/share. 4,500 1,000 4,000 Dec-12 Oral care bellwether… 800 Feb-13 May-13 Price (R.H.S) Aug-13 Nov-13 Nifty (L.H.S) Analyst’s name Sanjay Manyal sanjay.manyal@icicisecurities.com Parineeta Poddar parineeta.poddar@icicisecurities.com ICICI Securities Ltd | Retail Equity Research Exhibit 1: Financial Performance (Year-end March) Net Sales (| crore) EBITDA (| crore) Net Profit (| crore) EPS (|) P/E (x) Mcap / Sales (x) RoCE (%) RoNW (%) (| crore) FY11 2,220.6 449.0 405.2 29.8 42.3 7.7 108.0 105.5 Source: Company, ICICIdirect.com Research FY12 2,693.2 578.5 446.5 32.8 38.4 6.4 123.8 102.5 FY13 3,163.8 656.8 496.8 36.5 34.5 5.4 125.2 101.5 FY14E 3,562.2 694.5 576.5 42.4 29.7 4.8 102.3 91.4 FY15E 4,070.2 857.3 619.6 45.6 27.7 4.2 117.4 91.2 Shareholding pattern (Q2FY14) Shareholder Holding (%) Promoters 51.0 Institutional Investors 26.5 Public 22.5 FII & DII holding trend (%) 25 20 15 10 5 0 20.9 6.0 21.6 21.6 21.3 5.2 5.4 19.8 6.7 5.6 Q2FY13 Q3FY13 Q4FY13 Q1FY14 Q2FY14 FII DII Company Background Colgate-Palmolive (India) (CPIL) is a 51% subsidiary of Colgate Palmolive Company (CPC), US. CPIL began operations in India in 1937 and has successfully completed 75 years of operations in the oral and personal care industry in India. CPIL, headquartered in Mumbai, is the country’s leading oral care company generating ~95% of its revenues (| 3006 crore) from the oral care business with its flagship brand Colgate and ~5% from its personal care business (| 158 crore) under the brand Palmolive. The company has an insignificant presence in the household care segment with its brand Axion. Within the oral care segment, the company generates ~79% revenue from toothpaste (~| 2373 crore in FY13), ~12% from tooth brush (~| 348 crore in FY13) and ~9% from other oral care products (toothpowder, mouthwash, dental floss, total ~| 285 crore in FY13). It is the market leader in the toothpaste and toothbrush segments in India with volume share of 55.4% and 41.5%, respectively. In the personal care segment, CPIL is present only in the skin and hair care segment offering soaps, shower gels, shaving cream, skin cream and shampoos. Over the years, with the successful launch of oral care products within each strata of purchasing power (premium, popular and economy) and within each sub-segment of the respective category (e.g. sensitive toothpaste in toothpaste, gum care toothbrush in brushes) in oral care, the company has developed a strong brand equity (awarded the country’s most trusted brand in 2003-07 and 2011-12). This has aided the company to post strong revenue, EBITDA and PAT growth at 16.5%, 23.7% and 16.5% CAGR, respectively in FY08-13. Exhibit 2: Colgate revenue break-up (FY13) Colgate India Total Sales (|3164 crore) Personal care ~5% of the Sales (~|158 crore) Oral care ~95% of the Sales (~|3006 crore) Toothpaste ~79% of oral care sales (~|2373 crore) Toothbrush ~12% of oral care sales (~|348 crore) Others ~9% of oral care sales (~|285 crore) Source: Company, ICICIdirect.com Research ICICI Securities Ltd | Retail Equity Research Page 2 Exhibit 3: Timeline of launches by CPIL within oral and skin care segments Incorporated in India as a private limited company Colgate Palmolive India Limited became the official name Launched Colgate Total Launched Colgate Stripe paste & Palmolive Naturals Soap,Keratin Shampoo & Palmolive Optima in hair care segment Launched Colgate Sensation Colgate Max Fresh Introduced Herbal White &gel is launched, Simply White, new aromaColgate 360 therapy products under toothbrush Colgate Visible introduced Palmolive White introduced 1937 1949 1953 1978 1993 1994 1996 1998 1999 2000 2003 2005 2006 2011 2013 Colgate Powder was launched Introduced the 1st Flouride toothpaste CPIL was listed on the stock exchange Acquired Cibaca brand Launched Colgate Double Protection Re-launched Cibaca & Charmis cream, Launched Palmolive shave Gel, Colgate Herbal, Zig Zag & Navigator toothbrush Colgate Double Protection Launched Colgate Launched Colgate Active Salt Sensitive Protoothpaste Relief Source: Company, ICICIdirect.com Research Exhibit 4: CPIL’s extensive products basket Oral care Toothpaste Colgate Dental Cream Toothbrushes Colgate 360 Toothpowder Colgate Toothpowder Colgate Total Colgate Sensitive Colgate Visible White Colgate 360 Sensitive-Pro-Relief Colgate Sensitive Colgate ExtraClean ColgateSensitive-Pro-Relief Colgate Extra-Clean Gum Care Colgate Max Fresh Colgate Kids 2+ Colgate Kids ToothPaste Colgate Zig Zag Colgate Herbal Colgate Cibaca Family Protection Colgate 360 Actiflex Whitening Product Colgate Maxwhite Kids Product Colgate Kids ToothPaste Mouthwash Colgate Plax Colgate Kids 2+ Colgate Active Salt Colgate Maxwhite Personal care Household care Body Wash Liquiud Hand Wash Palmolive Naturals Palmolive Naturals Liquid Hand Wash - Family Health Moisturizing Body Wash Milk & Honey and Milk & Almond Palmolive Aroma Shower Gel Relax Palmolive Aroma Shower Gel Vitality Palmolive Thermal Spa Firming & Massage Shave Preps Skin Care Hair Care Palmolive Shave Cream Palmolive Charmis Cream Halo Shampoo Surface Care Axion Dish Washing Paste From the dentist Gingivtis Treatment Sensitivity Treatment Tooth Whitening Fluroide Therapy Specialty Cleaning Colgate PerioGard Colgate Sensitive Colgate Visible White Colgate Phos-Flur Colgate Interdental Brush Colgate Sensitive Pro-Relief Colgate Orthodontic Brush Colgate Gel Kam Source: Company, ICICIdirect.com Research ICICI Securities Ltd | Retail Equity Research Page 3 Investment Rationale Market leadership in oral care to sustain Over the years, CPIL has maintained its market leadership in the oral care segment with 55.4% share by volume (April, 2013) in the toothpaste category and 41.5% volume share (April, 2013) in the toothbrush category. The nearest competitors in the toothpaste and toothbrush categories have 23.5% (April, 2013) and 19.1% (April, 2013) share by volume, respectively. We believe the company’s strong brand equity in the segment, significant premium in market share compared to its competitors, comprehensive oral care portfolio and increasing reach in rural markets would maintain its leadership position in the oral care industry. Hence, we expect the volume growth (CAGR FY13-15E) to remain healthy in toothbrush at 17% and toothpaste at 9.3% keeping the volume share for the company intact. Exhibit 5: CPIL’s toothpaste market share (%) Exhibit 6: CPIL’s toothbrush market share (%) 45 60 55 50 52.4 53.5 52.4 54.2 55.4 42 39 49.4 40.0 39.5 38.4 35.8 36 45 41.5 40.8 33 30 40 2008 2009 2010 2011 2012 Source: Company, ICICIdirect.com, Research Years pertain to calendar year; 2013 share is up to April, 2013 2013 2008 2009 2010 2011 2012 2013 Source: Company, ICICIdirect.com, Research Years pertain to calendar year; 2013 share is up to April, 2013 Toothpaste: Brand strength to keep growth intact The brand dominance of Colgate in the toothpaste category has made it synonymous with the category itself. Toothpaste revenue mix for CPIL Classification Family % of revenues 51% Freshness Premium 20% 18% Mass 11% Products Colgate Dental Cream, Active Salt, Herbal, Max white Colgate Max Fresh Colgate Total, Colgate Visible white, Sensitive Pro-Relief Colgate Cibaca ICICI Securities Ltd | Retail Equity Research Toothpaste contributes ~75% of CPIL’s revenues (~| 2373 crore FY13) and has posted 16.9% CAGR from FY08-13. We expect the growth to remain strong at 14% CAGR in FY13-15E on the back of the company’s strong volume market share in the segment, increasing per capita consumption and rising penetration of toothpaste in rural markets. CPIL’s market share (volume) in toothpastes has increased from 49.4% in FY08 to 55.4% in April, 2013 supported by strong volume growth of 11.6% (CAGR FY08-13). Further, led by CPIL’s dominance in the toothpaste market, the increasing per capita consumption in the country from 108 gm in FY08 to 146 gm in FY13 (6.2% CAGR in FY08-13) has directly benefited the company. Going ahead, we believe that with per capita consumption expected to grow at 5.6% CAGR in FY13-23E to ~240 gm by FY23E and Colgate’s ability to maintain its market leadership through increasing innovation and distribution, CPIL’s toothpaste volume CAGR would remain strong at 9.3% in FY13-15E. Further, with new launches both in the premium and economy segments maintaining their pace, we expect CPIL to post value growth of 14% CAGR in FY13-15E. Page 4 Exhibit 7: Toothpaste volume and value growth (in %) 25 22.1 20 15 12.2 We expect CPIL to grow ahead of the market both in 9.0 10 volume and value terms led by the company’s leadership that would aid in capturing the share of unorganised players 18.2 17.0 14.0 11.0 12.0 12.0 13.2 14.4 14.0 10.0 13.5 9.5 9.2 FY14E FY15E 5 coupled with its ability to innovate within the category 0 FY08 FY09 FY10 FY11 Volume Growth FY12 FY13 Value Growth Source: Company, ICICIdirect.com Research CPIL’s market share in toothpaste has strengthened over time from 49.4% in CY08 to 55.4% in April, 2013. We believe the increase in market share of the company has been driven by eating up the market share of HUL (Pepsodent and Close-Up) and Dabur (Dabur Red, Babool and Meswak) led by CPIL’s higher promotional activities, increasing distribution and product innovation ability. CPIL has constantly innovated and developed the category by launching products and creating new sub-segments to meet the changing needs of consumers. For instance, with the launch of Colgate Sensation way back in 1999, CPIL was the first to enter the sensitive segment in India. The segment is now witnessing active participation from competitors. However, CPIL enjoys the first mover advantage. Exhibit 8: CPIL’s toothpaste market share compared to its competitors 60 50 53.5 52.4 49.4 55.4 54.2 52.4 40 30 24.5 22.8 22.5 23.9 23.7 23.5 20 10 0 2008 2009 2010 Colgate 2011 Competitor 1 2012 Source: Company, ICICIdirect.com, Research Years pertain to calendar year; 2013 share is up to April, 2013 2013 Exhibit 9: CPIL’s presence across all sub-segments compared to peers Toothpaste sub-segments Basic Economy Freshness Gum Care Herbal Kids Red Salt Sensitive White Colgate P P P P P P P P P Dabur P P P P - GSK P - HUL P P P P P P P P P&G P - Source: Company, ICICIdirect.com, Research P=Present in the sub-segment Further, led by the changing lifestyle and needs of the consumers, CPIL has constantly launched toothpastes to meet the changing demands. This has led the company to have a complete portfolio of toothpastes spanning across all sub-segments of the category (sensitive, gumcare, whitening) and all price points (| 5 for 10 gm to | 120 per 100 gm) giving it an edge over its competitors whose oral care portfolio is quite limited when compared to the market leader, enabling CPIL to command the market dominance it does in toothpaste. ICICI Securities Ltd | Retail Equity Research Page 5 Toothbrush: Continues to lead market with strong volume growth CPIL’s volume growth in toothbrush has been healthy at 21.2% CAGR from FY08-13 with market share undeterred at 41.5% (June, 2013), largely by the shift in demand from unorganised to branded players and increase in penetration. Colgate offers its toothbrushes at all price points of the category, economy (Zig-Zag & Extra clean), popular (Colgate 360, Colgate Max-Fresh) and premium (Colgate Zig-Zag germ protector & Colgate 360 Whole Mouth Clean Electric). With CPIL being the market leader and its presence across the value pyramid, we believe it would continue to maintain its market share in the toothbrush category also (category growing at 15-20% by volumes). CPIL has maintained its volume share despite the aggressive promotional activities by its nearest competitor, Procter & Gamble (brand: Oral-B). In spite of this, P&G continues to remain a distant second in the toothbrush category with 19.1% volume share (April, 2013). Hence, with the segment expected to grow at 15-20% per annum, we estimate volume growth of 17% CAGR in FY13-15E for CPIL. The value growth in toothbrush has been 19.4% CAGR in FY08-13. We expect this to continue to grow at 20.4% CAGR in FY13-15E driven by the premiumisation in the category. Exhibit 10: Toothbrush volume market share (%) 50 40 The toothbrush market is estimated at ~| 1600 crore (FY13). Total ~40% of the value market is controlled by the 40.8 40.0 38.4 30 top two players. 20 16.0 19.4 18.4 17.4 16.0 41.5 39.5 35.8 19.1 10 The stupendous increase in toothbrush sales volume in FY07 was on the back of the promotional offer run by the 0 company. We believe that the offer was implemented by 2008 the company to de-stock its toothbrush inventory from its 2009 2010 2011 Colgate Competitor 1 2012 2013 Sewri unit. The unit was shut down during that year and the company shifted the manufacturing of toothbrushes capacity to the Baddi unit. Source: Company, ICICIdirect.com Research Years pertain to calendar year; 2013 share is up to April, 2013 Exhibit 11: Toothbrush volume and value growth (%) 60 50 We believe the growth was led by the promotional offer of the company 50 40 26.8 30 20 24.2 15 12.8 29.7 25 22 22.2 15.6 6.6 10 10 12 18 21.9 16 18.9 0 -10 -20 FY07 FY08 -8 FY09 FY10 FY11 FY12 FY13 FY14E FY15E Impact of high base of FY07 due to the promotional offer Source: Company, ICICIdirect.com Research ICICI Securities Ltd | Retail Equity Research Page 6 Low penetration & per capita consumption provide headroom for growth The penetration of toothpaste in India has increased from ~56% in FY08E to ~71% FY13E. In spite of the increase, there still remains ~30 crore people (~10% of the urban population and ~37% of rural population) using conventional methods of oral care. Hence, being the market leader, this throws up a big untapped opportunity for Colgate. Exhibit 12: Toothpaste penetration (%) trend 90 75 80 80 79 78 87 84 70 56 60 50 38 40 43 2006 2007 91 61 63 2011 2012 49 46 42 90 30 2005 2008 2009 Urban 2010 Rural Source: Company, ICICIdirect.com Research Further, with the country’s per capita consumption being abysmally low at 137 gm in FY12 (146 gm in FY13) compared to China at 277 gm, Philippines at 374 gm and Brazil at 622 gm, we believe Colgate still has enough room for growth. We estimate that with 6.2% volume growth and 1.3% population growth until 2023E, the per capita toothpaste consumption could increase to ~235 gm (~1.6x from current consumption). The increase could be higher if changes in consumer habits and preferences follow global trends. Exhibit 13: Per capita consumption of toothpaste (gram) (FY12) 700 280 600 240 500 200 400 300 Exhibit 14: India’s per capita consumption (gram) 622 561 200 160 374 100 120 277 137 0 Brazil USA Philipines China Source: Company, ICICIdirect.com, Research 235 India 80 108 108 116 FY08 FY09 FY10 154 163 127 138 146 FY11 FY12 FY13 FY14E FY15E FY23E Source: Company, ICICIdirect.com, Research The growth in per capita consumption can be driven by an increase in penetration, which would consequently be driven by an increase in the shift of consumers to toothpaste from toothpowder in rural areas and increase in number of people towards brushing twice daily from once currently. In India, currently only ~15% brush twice daily in contrast to developed markets where ~87% brush twice daily. Hence, as toothpaste penetration and the habit of brushing twice daily increases in the country, CPIL being the market leader would benefit significantly. ICICI Securities Ltd | Retail Equity Research Page 7 Apart from this, increasing distribution reach and higher advertisement by oral care companies and increasing the awareness about oral hygiene would also drive penetration. Further, the market for advanced oral care products, mouth wash, dental floss and teeth whitening products is still at a nascent stage in India and present only in urban markets. However, with CPIL’s early entry into these segments, we believe that as the segment evolves, CPIL will further benefit from the category expansion. Brand strength to aid in combating competition With competition in the economy category from Ajanta and Amar being effectively combated by Cibaca, Dabur predominantly offering products in the herbal space and Hindustan Unilever (HUL) no longer gaining market share, we believe the competitive scenario augurs well for Colgate. Additionally, while Colgate markets an entire oral-care range, with strong market shares in all sub-segments, HUL and Dabur are present only in certain sub-segments, enabling the company to increase or decrease prices in other sub-segments while holding prices of some constant. Though CPIL’s brand strength has aided it to maintain its leadership position, the rising threat for CPIL is from new entrants, GSK and P&G, in the premium segments (GSK has already overtaken CPIL’s market share in the sensitive segment). With P&G’s entrance in the toothpaste segment with its brand ‘Oral B’ and as known, P&G being a fierce competitor, we believe CPIL would have to increase its spends to sustain its market share. This could thereby impact its margins. Hence, though we remain confident that CPIL has enough room for expanding its marketing spends without substantially impacting its demand and brand equity, we remain wary of any significant margin expansion until FY15E to see how competitive activity plays out. ICICI Securities Ltd | Retail Equity Research Page 8 Though HUL has a fairly vast portfolio of products in each product and sub-segments also, it has failed to create the same brand equity and thereby impact CPIL’s market share. Even post P&G’s re-entry into India in the toothpaste segment, the company’s market share has failed to witness any moderation stressing on the brand strength of CPIL in the oral care industry in India Unmatched product portfolio in oral care CPIL has the most extensive oral care product portfolio among FMCG players. The company has offerings across the value pyramid (economy, popular and premium) as well as within each sub-category (sensitive toothpaste, gum care toothpaste, electric brush, kids brush) providing consumers with both up-trading as well as down-trading opportunities. With P&G present only in the popular and premium segments, Dabur in the economy segment and HUL largely in the popular and premium segments and absent in the herbal segment, CPIL gets an edge over them and, thereby, enjoys significant strength in oral care market share. Exhibit 15: Exhibit 12: Product portfolio across segments with price points TOOTHPASTES Mass (|5-|40) Popular (|41-|60) Premium (|61 and above) TOOTHBRUSHES Mass (|10-|30) Popular (|31-50) Premium (|51 and above) OTHERS Colgate Colgate Dental Cream - |36 Colgate Cibaca - |23 Colgate Herbal - |39 Colgate Active Salt - |40 Colgate Total -|60 Colgate Max Fresh Red - |52 Dabur Dabur Red - |38 Dabur Babool - |33 Meswak - |37 Dabur Babool Active Salt - |28 Colgate Max White - |52 Colgate Total - Progum - |67 Colgate Visible White - |80 Colgate Sensitive - |113 ColgateSensitive-Pro-Relief -|136 Colgate Kids - |90 Colgate Colgate Extra Clean - |17 Colgate Kids- |12-|17 Colgate Zig Zag - |22-|28 Colgate Gum Comfort - |30 Colgate Extra Clean Gum Care Colgate Super Shine - |20 Colgate Super Junior - |12 Colgate Super Flexi - |14 Colgate Max Fresh - |50 Colgate 360 - |45 Colgate Sensitive - |40 Colgate Kids Barbie - |69 Colgate 360 Acti Flex - |69 Colgate Smiles Spiderman - |69 Colgate 360 Sensitive Pro-Relief - |69 Colgate 360 surround - |75 Colgate 360 Electric- |395 Colgate Colgate Mouthwash - |60 Colgate Tooth powder - |17 Dabur HUL Pepsodent Germi Check- |33 Pepsodent Regular - |33 Pepsodent Super Salt - |22 Pepsodent Complete - |73 Close - Up Red - |53 Pepsodent Centre Fresh - |51 Close Up Fire Freeze - |60 Pepsodent Whitening - |53 Pepsodent Gum Care Pepsodent Expert Whitening - |63 Pepsodent Sensitive - |113 Pepsodent Pro-Relief - |175 Pepsodent Sensitive Plus - |175 Pepsodent Kids - |68 HUL Pepsodent Smart Clean - |11 Pepsodent Germi Check Fighter - |17 Pepsodent Kiddy - |14 Pepsodent Double Action - |28 P&G All Rounder 32 - |44 All Rounder Gel - |45 Pro Health - |77 P&G Cross Action Pro-Health - |50 Aral B All Rounder - |28 Oral B Cross Action - |69 Oral B All Rounder - |22 Oral B Advantage Sensitive - |35 Oral B Advantage Plus - |40 Oral B Kids - |25 Pepsodent complete Clean -|50 Pepsodent Ultra Care - |50 Pepsodent Pro Gum health - |50 Pepsodent Pro Whitening - |59 Pepsodent Pro-Complete - |59 Pepsodent Pro Sensitive - |59 Pepsodent Double Care -|80 Dabur HUL Pepsodent Mouth Wash - |60 P&G Dabur Lal Manjan - |15 Source: Company, ICICIdirect.com Research Prices recorded as on October,2013. Prices have been adjusted for 100 gm for the ease of comparison With toothpaste being a non-discretionary consumption item, especially in urban India, it is largely immune to any significant dip in consumption volume during a tough economic scenario. However, there could be down trading during such times. This would trim the value growth for oral care keeping volume growth intact. Similarly, when economic conditions improve, consumers tend to up-trade to premium offerings. Hence, with Colgate’s presence across the value chain and within all subsegments of categories (toothpaste and toothbrush) we remain confident on the company’s volume growth and ability to withstand the current economic downturn. ICICI Securities Ltd | Retail Equity Research Page 9 Further, though CPIL has a strong portfolio in India compared to its competitors, there still remains a wider global portfolio of Colgate US, which the company can bring to India. Colgate being the global leader in oral care, imbibing products from the global portfolio would further strengthen the company’s presence in India as consumption and penetration increases. Exhibit 16: Colgate's global portfolio Oral Care Personal Care Toothpaste Colgate Total Advanced Colgate Optic White Colgate Total Colgate Sensitive Pro-Relief Colgate Max Fresh Colgate Luminous Colgate Sensitive Colgate 2in1 Colgate Sparkling White Colgate Cavity Protection Ultrabrite Colgate Triple Action Colgate Baking Soda and Peroxide Whitening Bubbles Colgate Tartar Protection with Whitening Colgate Total Pro Shield Plus Sensitivity Toileteries Speed Stick Power Toothbrush Colgate 360 Colgate Slim Soft Colgate Wisp Colgate Max White Colgate Wave Colgate Plus Colgate Extra Clear From the Dentist Colgate Prevident Colgate PerioGard Colgate Phos-Flur Colgate PreviDent Varnish Colgate Gel-Kam Colgate Duraphat Others Colgate Orabase Colgate Peroxyl Colbate Phos-Flur Women Deodorant Body wash Lady Speed Stick Stainguard Softsoap Fragrance Collection Liquid Hand Soap Softsoap Classics Bar Soap Softsoap Bar Soap Orther Speed Stick Speed Stick 24/7 Lady Speed Stick 24/7 Teen Spirit Softsoap Advanced Benefits Softsoap Pampered Hands Foam Speed Stick StainGuard Lady Speed Stick Antiperspirant POWER Irish Spring Original Irish Spring Moisture Blast with HydroBeads Irish Spring Deep Action scrub Irish Spring Icy Blast Irish Spring Aloe Afta Skin Bracer Home Care Pet Nutrition Dishwashing Ultra Palmolive Antibacterial Dish Liquid Ultra Palmolive Dish & Sponge Fresh Palmolive Fresh Infusions Ultra Palmolive Oxy Power Degreaser Ultra Palmolive soft touch Palmolive eco Dishwashing Detergent Ajax Dish Liquid Ajax Dish Packs Household Cleaners Murphy Oil Soap AJAX Fabuloso Kids Products Colgate Dora the Explorer Colgate 2 in 1 Colgate SpongeBob SquarePants My First Colgate Transformers Fresh 'n' Protect Kids Toothpaste Colgate Kids Tooth brush Softsoap Premium Collection Irish Spring Body Wash Softsoap Kids Foam Works Fabric Conditioner Suavitel Ultra Liquid Fabric Conditioner Suavitel Regular Liquid Fabric Conditioner Suavitel Dryer Sheets Product Ingredients Palmolive Murphy Oil Soap Suavitel Fabuloso Ajax Dermassage Hillspet Nutrition Source: Company, ICICIdirect.com Research ICICI Securities Ltd | Retail Equity Research Page 10 Increasing rural demand key driver for revenue growth While the company’s strong brand equity has enabled it to command a strong pricing position in the premium segment, volume growth has been driven by economy brands like Colgate Cibaca (leader in the economy segment). CPIL’s brand Cibaca has carved a niche for itself in the rural and semi-urban markets by registering robust volume growth of around 11-12%. As Cibaca is a low priced product, the growth is indicative that rural consumers are gradually shifting from tooth powder to toothpaste. Since over 35% of rural households still use non-dentifrice products like ash, charcoal, neem sticks, salt, husk and tobacco to clean their teeth, we believe the company can tap the immense rural Indian opportunity by proactively converting non-dentifrice users to toothpowder and gradually to toothpaste. According to the company, the | 10 SKU for toothpaste has become more crucial for the company compared to | 5 earlier. This reflects that rural consumers are increasing spend on the oral care category and increasing consumption frequency. In the last three to five years, higher growth in rural incomes compared to growth in urban income has driven the toothpaste penetration in rural India from 42% in 2006 to 63% in 2012. CPIL leveraged on this opportunity, increased its distribution presence in rural India and expanded its SKUs price range to as low as | 5 packs. With higher growth rates in toothpaste volumes recorded in the rural segment and the company’s efforts to launch new variants in Cibaca at a lower price point, we believe the positioning of Cibaca as a “value for money” product will prove to be beneficial in the long term. Furthermore, while CPIL’s current distribution reach extends to ~90% of the penetrated market, we believe the company’s focused initiatives and campaigns in rural areas will not only strengthen its brand equity and brand awareness but also expand its distribution blueprint. Strength in distribution to aid in capturing untapped markets Though CPIL is present only in one category, its distribution reach extends to more than 5 million retail outlets. From 2010-12, the company increased its distribution reach by ~20% (added more than 0.8 million outlets). The increasing distribution network in rural areas has significantly benefited the company taking advantage of increasing rural incomes in the last three to five years. CPIL’s direct reach is now in almost 90% of the penetrated market, which would help it push its low price SKUs in rural areas, premium offerings in urban markets and driving growth in advanced oral care products. Exhibit 17: Distribution reach (in million retail outlets) 8 7 6 5 4 3 7.2 6.0 5.8 5.6 2 5.1 4.0 1 2.9 0 HUL ITC Dabur P&G Colgate Marico Jyothy Lab Source: Industry, ICICIdirect.com Research ICICI Securities Ltd | Retail Equity Research Page 11 Higher A&P expenses keeps market share intact The company has been able to increase its operating margins while maintaining advertisement expenditure Consistently high advertisement expenses have helped the company to effectively combat increasing competition in the oral care space from HUL and P&G Among leading oral care players, CPIL has one of the highest advertisement & promotion (A&P) spends compared to its peers in the oral care segment at 15.5% (FY13). By maintaining higher advertisement expenses (~65% of total A&P expenses) the market leader has been able to effectively drive penetration and the oral care industry’s growth through increasing awareness of oral care hygiene and supporting its new launches. Colgate is also focusing on advertisements on regional TV channels, which would help it to capture rural territories. Recently, HUL became aggressive in oral care advertisement using direct comparative ads mentioning Colgate, which we believe would hardly impact CPIL’s market share considering the premium in market share than CPIL enjoys coupled with its high brand equity compared to HUL’s brands Close-Up and Pepsodent. Though GSK has also been increasing it’s A&P spend lately post the national launch of its sensitive care brands Sensodyne and Parodontax, Colgate has consistently spent more than 15% of its sales in A&P, keeping its volume growth intact in spite of increasing competition. The lately rising concern, however, is the entry of a tough competitor P&G in the toothpaste segment with Oral-B. With P&G’s history of being a brutal competitor (cut throat competition in detergents with HUL) with market leaders in the segment in which it ventures, we would remain wary of P&G’s future actions that could impact CPIL’s margins. However, given CPIL’s higher margins at ~21% (FY13) we believe CPIL still has enough room to expand its advertisement expenses in case competition in the segment gets aggressive without impacting its margins. With the slated new launches for urban markets and increasing reach in rural markets, we expect advertisement expenses to remain at higher levels compared to its peers at 12.4% in FY14E and 13.3% in FY15E without impacting margins. Exhibit 18: A&P as % of sales for all oral care players in India (FY13) 19 17 18 15 17 17.8 16.5 16.1 15.3 16 13 15.8 15.3 15.5 15 11 9 Exhibit 19: A&P expenditure as percentage of net sales for Colgate (%) 12.8 13.6 15.6 15.5 13.3 14 12.4 13 12.4 12 7 11 5 HUL Dabur Colgate P&G* GSK Source: Company, ICICIdirect.com, Research * P&G corresponds to Gillette under which the company reports its oral care revenues. A&P expenses do not include the trade incentives for P&G ICICI Securities Ltd | Retail Equity Research 10 FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14E FY15E Source: Company, ICICIdirect.com, Research Page 12 Pricing power and changing product mix to aid margins Led by the company’s strong brand equity, CPIL enjoys strong pricing power in the oral care industry. This enables it to easily pass on higher raw material cost through increasing prices without impacting its volume growth and concurrently expanding its gross margins. Accordingly, in spite of ~10% increase in crude prices and increase in sorbitol prices (key raw materials of CPIL) in the last three to five years CPIL has reduced its raw material expenses to sales ratio from 42.9% in FY08 to 39.5% in FY13. Gross margins have, thereby, expanded from 57.1% in FY08 to 60.5% in FY13. Other than higher prices in the existing portfolio, the increasing number of innovative launches in sub-segments (Colgate sensitive, sensitive pro-relief and Colgate visible white), thereby driving premiumisation, has further aided in improving gross margins by changing the product mix. Going ahead, we believe that with raw material prices remaining at current levels (crude at ~$110/barrel and sorbitol prices supported by favourable monsoon during the year) and the company’s continuous efforts to introduce premium products from its global portfolio, CPIL’s gross margins would remain at elevated levels of ~60% until FY15E. Exhibit 20: Gross margins for CPIL (in percentage) 62 60.4 61 60.7 61.0 60.5 60.5 60 59.8 59 58 57.1 56.3 57 56 55 54 53 FY08 FY09 FY10 FY11 FY12 FY13 FY14E FY15E Source: Company, ICICIdirect.com Research ICICI Securities Ltd | Retail Equity Research Page 13 Strong balance sheet provides further comfort With a dominant market share in the oral care segment, the company has consistently lowered its working capital intensity through a reduction in debtor days and an expansion in supplier credit given its significant buying power, thereby enabling it to register negative working capital and maintaining healthy cash flows. This, along with a high dividend payout ratio of around 85-90% and lower capital expenditure requirements, has enabled the company to upkeep the high return ratios and maintain capital efficiency. In November 2007, the company completed a capital reduction plan, thereby reducing its share capital from |136 crore to |13.6 crore by reducing the face value of each share from | 10 to | 1 (returning |9/share back to shareholders). This measure was aimed at returning the surplus cash as well as improving profitability metrics like return on equity (RoE) and return on capital employed (RoCE). Hence, RoE jumped from 53.3% in FY07 to 101% in FY13 while RoCE also rose from 47.3% to 125.2% in the same period. Therefore, given the company’s healthy cash flows, lower capital expenditure requirements and higher dividend payouts, we expect CPIL to maintain attractive RoCE and RoE ratios at ~120% and 91% in FY15E, respectively. ICICI Securities Ltd | Retail Equity Research Page 14 Financials Revenues to grow at 13.4% CAGR in FY13-15E CPIL’s revenues have more than doubled in the past six years from | 1473.4 crore in FY08 to | 3163.8 crore in FY13 (CAGR of 16.5%). The increase has been supported by consistent volume growth in both toothpastes (average of 11.3%) and toothbrushes (average of 13.8%) and marginal price hikes. With one of the strongest distribution networks and launches of new variants, we believe CPIL would be able to maintain volume growth at ~10% in toothpastes and ~17% in toothbrushes in oral care. Hence, supported by healthy volume growth and marginal price hikes of 3-5%, we expect revenues to maintain growth at 13.4% CAGR from FY13-15E. The revenue growth would also remain higher led by increasing contribution of premium products. Exhibit 21: Revenues (| crore) and revenue growth (YoY in %) trend 4500 3750 3000 25 21.3 13.8 15.0 17.5 15.8 20 13.2 14.3 12.6 15 2250 10 1500 750 0 5 1473 1695 1962 2221 2693 FY08 FY09 FY10 FY11 FY12 Sales (| Crore) - LHS 3164 3562 4070 FY13 FY14E FY15E 0 % growth - RHS Source: Company, ICICIdirect.com Research Margins to improve to 20.9% by FY15E CPIL’s EBITDA margins have improved significantly from 15.4% in FY08 to 20.8% in FY13 led by gross margin expansion and increasing contribution of premium products in revenues. Going ahead, we expect CPIL to maintain high EBITDA margins at 19.3% (FY14E) and 20.9% (FY15E) as premiumisation gains traction. Exhibit 22: EBITDA margins (%) trend 24 21.6 22 21.5 20.2 20.9 20.8 19.3 20 18 16 15.4 15.4 FY08 FY09 14 12 10 FY10 FY11 FY12 FY13 FY14E FY15E Source: Company, ICICIdirect.com Research ICICI Securities Ltd | Retail Equity Research Page 15 Net profit to grow at 11.7% CAGR in FY13-15E CPIL’s profits have grown at 16.5% CAGR in FY08-13 aided by improving margins and lower tax liability (tax benefits from Baddi facility). However, these tax benefits would end by FY14E, which would increase the company’s tax rate from 25.1% in FY13 to 28.5% in FY15E. Hence, we expect profit growth to moderate slightly to 11.7% CAGR in FY13-15E from | 497 crore in FY13 to | 620 crore in FY15E. Exhibit 23: PAT (| crore) trend 700 576 600 500 423 400 300 232 50 40 497 446 405 620 30 290 20 200 10 100 0 0 FY08 -100 FY09 FY10 FY11 FY12 PAT (| crore) - LHS FY13 FY14E FY15E -10 % growth Source: Company, ICICIdirect.com Research Exceptional return ratios CPIL has exceptional return ratios of more than 100% mainly due to high dividend payout of ~70% and ~| 560 crore of free cash flow in FY13. The free cash flow of CPIL has increased from | 380 crore in FY08 to | 560 crore in FY13. Return ratios for CPIL have remained on a higher trajectory of ~100% since FY08 following the buy-back by the company in FY08 and reducing the face value to | 1/share from | 10/share. This improved the RoE from 57.1% in FY07 to 142.8% in FY08. With no major capex plans lined up by the company, we expect the payout to increase to ~90% from FY15E onwards, thereby keeping return ratios at elevated levels. We have modelled a small capex of | 190 crore in FY14E and | 90 crore in FY15E (on account of the new facilities in Sanand, Gujarat and Sricity, Andhra Pradesh), thereby maintaining RoE at ~91% until FY15E and RoCE at ~120% until FY15E. Exhibit 24: Return ratios (%) trend Exhibit 25: Dividend payout (%) and dividend per share (| per share) 130 150 100 120 130 80 110 110 90 100 70 90 50 80 30 FY08 FY09 FY10 FY11 FY12 FY13 FY14E FY15E RoCE (%) - LHS RoNW(%) - RHS Source: Company, ICICIdirect.com, Research ICICI Securities Ltd | Retail Equity Research 45 40 35 30 25 20 15 10 5 0 60 40 20 0 FY08 FY09 FY10 FY11 FY12 Dividend Per share (|) - RHS FY13 FY14E FY15E Dividend Payout (%) - LHS Source: Company, ICICIdirect.com, Research Page 16 Risks & Concerns Deteriorating fundamentals may take toll on volumes CPIL, which currently dominates the oral care category with an overall market share of ~55% (April, FY13), has witnessed robust volume growth in the past. Although there has been no sign of a decline in volumes, given the current slowdown in consumer demand and increasing competition this risk looms on the horizon. Further, even if volume growth is not impacted, downtrading and lower-than-expected growth in premiumisation could impact value growth and keep EBITDA margin and PAT growth moderate. Sole dependence on oral care segment With ~95% of CPIL’s revenues being derived from the oral care business there is large dependence on one category for a significant portion of revenues. We believe any adverse impact witnessed in this category can hamper the company’s growth prospects dramatically. Susceptible to inflationary pressures Any exuberant rise in crude prices (used for packaging) and chemicals such as sorbitol (a maize derivative) would adversely affect the raw material costs of the company, thereby hampering margins. New entrants to intensify competition Although CPIL commands a leadership position in the oral care category, a threat of competition exists from new entrants such as GSK and P&G, which could consequently erode CPIL’s market share. Excise benefits at Baddi manufacturing facility Colgate’s tax rate has consistently increased over the past four years, as its toothpaste manufacturing facilities at Baddi and Himachal Pradesh were removed from 100% tax exemption from March 2010 onwards. They have henceforth been shifted under 30% tax exemptions until FY15 after which there would be no exemptions. Further, with the two new facilities coming up, at Sanand and Sricity, CPIL’s tax rate would remain lower until FY15 as these new facilities enjoy some exemptions. Accordingly, we expect CPIL’s tax rate to increase by ~340 bps to 28.5% by FY15E from 25.1% in FY13E. However, after FY15E all tax exemptions in all facilities would become nil putting the company under the flat 30% tax bracket post FY15E. Exhibit 26: Tax rate (%) trend 30 25 20 15 10 20.7 16.0 5 22.6 24.1 25.1 25.8 FY11 FY12 FY13 FY14E 28.5 12.7 0 FY08 FY09 FY10 FY15E Source: Company, ICICIdirect.com Research ICICI Securities Ltd | Retail Equity Research Page 17 Valuation We have valued the stock on a triangulated value of P/E, EV/EBITDA and DCF methodology, assigning it a target price of | 1365/share. Historically, Colgate has traded at ~6% discount to the FMCG Index. However, in the last six months, the stock has been trading at similar multiples as the FMCG Index. We believe the shrinkage in discount has been led by CPIL’s ability to maintain strong volume growth compared to slowing growth in other FMCG companies and increasing competition in the oral care space. We believe the oral care industry in India has the space to grow further. Also, the potential of increasing penetration levels, per capita consumption and premiumisation is very high. Hence, this throws up a big opportunity for the market leader in the category. With consistent earnings growth, high dividend payout and exceptional return ratios, CPIL is one of the preferred stocks in the FMCG sector. PE band At the CMP, the stock is trading at 32.5x its FY14E Adj. EPS of |38.5 and 27.5x its FY15E Adj. EPS of | 45.6, which is merely 10% premium to its historic average (average has been 25x one year forward P/E). With healthy growth in revenues and earnings at 16.5% CAGR from FY08-13, dominance in oral care, consistent volume growth, high visibility in earnings growth and excellent return ratios, we believe this premium is justified. Going ahead, we expect the company’s revenue and earnings to post a CAGR of 13.4% and 11.7%, respectively from FY13-15E. We assign the stock a P/E multiple of 30x its FY15E EPS of | 45.6 to arrive at a fair value of | 1367/share. Exhibit 27: PE band 2000 1800 1600 1400 1200 1000 800 600 400 200 Close Price 14x 20x 26x 32x Mar-14 Nov-13 Jul-13 Mar-13 Nov-12 Jul-12 Mar-12 Nov-11 Jul-11 Mar-11 Nov-10 Jul-10 Mar-10 Nov-09 Jul-09 Mar-09 Nov-08 Jul-08 Mar-08 0 38x Source: Company, ICICIdirect.com Research ICICI Securities Ltd | Retail Equity Research Page 18 DCF valuation Using the DCF methodology, we have arrived at a fair value of | 1351/share, considering a terminal growth of 3.5% and weighted average cost of capital (WACC) of 10.7%. We have assumed the company would witness revenue growth (CAGR FY13-25E) of 14.7%, operating margins of 21% and higher tax rate of ~30% till 2025 given that the Baddi facility is coming out of tax breaks. Exhibit 28: DCF valuation | crore EBITDA Depreciation Tax NOPAT Capex Change in WC FCF FY13 FY14E FY15E FY16E FY17E FY18E FY19E FY20E FY21E FY22E FY23E 656.8 43.7 166.3 446.8 102.5 (167.7) 555.7 653.8 49.1 200.0 404.7 190.0 (18.0) 281.8 816.7 59.7 247.0 510.0 90.0 (37.6) 517.3 982.9 46.8 280.8 655.3 56.2 46.8 599.1 1,130.4 53.8 323.0 753.6 64.6 (63.9) 806.7 1,299.9 61.9 371.4 866.6 74.3 (73.5) 927.7 1,494.9 71.2 427.1 996.6 85.4 (84.5) 1,066.9 1,719.2 81.9 491.2 1,146.1 98.2 (97.2) 1,226.9 1,977.1 94.1 564.9 1,318.0 113.0 (111.7) 1,411.0 2,273.6 108.3 649.6 1,515.7 129.9 (128.5) 1,622.6 2,614.6 124.5 747.0 1,743.1 149.4 (147.8) 1,866.0 DCF Valuation PV of firm Less: Current Debt Total PV of Equity Cash Per Share Number of Equity Shares (Cr) DCF - Target price (|) | crore 17,937.4 17,937.4 31.5 13.6 1,350.5 Assumptions WACC Revenue CAGR over FY13 - FY25E Terminal Growth 10.7% 14.7% 3.5% Source: Company, ICICIdirect.com Research Exhibit 29: Sensitivity to WACC & terminal value Terminal Growth Rate % WACC % 9.7% 10.2% 10.7% 11.2% 11.7% 2.5% 1,466 1,350 1,248 1,160 1,082 3.0% 1,535 1,407 1,296 1,200 1,116 3.5% 1,615 1,472 1,351 1,245 1,154 4.0% 1,710 1,549 1,413 1,297 1,197 4.5% 1,823 1,639 1,486 1,357 1,246 Source: Company, ICICIdirect.com Research Triangulated Valuation We assign a weight of 0.5, 0.4 and 0.1 to the values arrived at from DCF, P/E and EV/EBITDA valuation, respectively. We arrive at a target price of |1365/share. Exhibit 30: Triangulated Valuation Methodology DCF P/E EV/EBITDA Target Price Fair Value (|) 1350.5 1366.9 1424.7 Weightage 0.5 0.4 0.1 Value (|) 675.3 546.7 142.5 1364.5 Source: Company, ICICIdirect.com Research ICICI Securities Ltd | Retail Equity Research Page 19 Peer comparison Given that the tax rate for the company would increase to 30% from FY16 onwards as tax benefits for the Baddi facility expire, the stock is trading at a discount to other MNC FMCG stocks like HUL and Nestlé India. This is mainly on account of the impact on earnings due to the higher tax rate. Considering this, we believe the stock is trading at attractive multiples. Though Colgate is better placed in terms of valuation multiple over other FMCG stocks and sustenance of volume growth, we believe the risk of increasing competition in the oral care space can affect volume growth, going forward. We initiate coverage on Colgate with a target price of | 1365 and assign a HOLD recommendation to the stock. Exhibit 31: Peer comparison ITC HUL Nestle Dabur Marico Colgate Mcap (| crore) 247896 124344 52942 28061 13476 17054 Sales CAGR (%) (FY08-13) 16.2 13.0 18.8 21.1 19.2 16.5 Sales CAGR (%) (FY13-15E) 13.1 10.0 12.0 15.2 14.7 13.4 EPS CAGR (%) (FY08-13) 18.4 15.5 20.9 18.1 17.2 16.5 EPS CAGR (%) (FY13-15E) 17.4 9.3 12.5 23.0 25.8 11.7 FY13 33.3 44.5 48.1 36.6 34.0 34.3 PE (x) FY14E FY15E 28.4 24.2 40.4 37.0 45.4 39.2 29.4 24.2 24.9 21.5 32.5 27.5 Price/sales(x) RoE (%) FY13 FY14E FY15E FY13 FY14E FY15E 8.4 7.6 6.5 33 34 36 4.9 4.5 4.1 142 106 95 6.4 5.8 5.1 59 51 51 4.6 3.9 3.4 40 40 40 2.9 2.8 2.2 25 23 23 5.4 4.8 4.2 101 91 91 Source: Company, ICICIdirect.com Research ICICI Securities Ltd | Retail Equity Research Page 20 Tables Exhibit 32: Profit & Loss Account (| Crore) (Year-end March) Net Sales Other Operating Income Total Operating Income Other Income Total Revenue Raw Material Expenses Employee Expenses Marketing Expenses Administrative Expenses Power & Fuel Manufacturing Royalty Misc. Total Operating Expenditure EBITDA Interest PBDT Depreciation PBT Total Tax PAT after MI Adjusted PAT EPS EPS (Adjusted) FY11 2,220.6 2,220.6 106.8 2,327.4 872.0 193.2 350.5 86.1 14.5 84.3 113.1 57.9 1,771.6 449.0 1.6 554.2 34.2 519.9 117.4 402.6 403.2 29.8 FY12 2,693.2 2,693.2 50.7 2,743.9 1,050.2 215.6 412.1 96.1 17.1 102.7 141.0 79.9 2,114.7 578.5 1.5 627.7 39.3 588.4 141.9 446.5 446.5 32.8 FY13 3,163.8 3,163.8 49.9 3,213.7 1,250.2 249.4 490.8 112.7 19.6 121.2 167.9 95.2 2,507.0 656.8 706.7 43.7 663.0 166.3 496.8 496.8 36.5 FY14E 3,562.2 40.6 3,602.8 60.5 3,663.3 1,408.4 248.9 441.8 809.2 2,908.3 694.5 755.0 49.1 776.5 200.0 576.5 524.0 42.4 FY15E 4,070.2 40.6 4,110.8 69.0 4,179.7 1,637.6 291.0 539.3 152.6 30.5 183.2 215.7 203.5 3,253.5 857.3 926.3 59.7 866.6 247.0 619.6 619.6 45.6 29.6 32.8 36.5 38.5 45.6 Source: Company, ICICIdirect.com Research ICICI Securities Ltd | Retail Equity Research Page 21 Exhibit 33: Balance Sheet (| Crore) (Year-end March) Equity Capital Reserve and Surplus Total Shareholders funds Total Debt Other Non Current Liabilities LT Provisions FY11 13.6 370.5 384.1 0.1 0.9 26.9 FY12 13.6 421.8 435.4 0.8 30.1 FY13 13.6 476.0 489.6 0.9 34.9 FY14E 13.6 617.3 630.9 0.9 34.9 FY15E 13.6 665.7 679.3 0.9 34.9 Liability side total 411.9 579.8 324.8 255.0 8.2 263.3 46.0 466.2 613.2 358.7 254.4 69.4 323.8 59.2 525.3 673.5 392.9 280.7 102.0 382.6 37.1 666.6 863.5 442.0 421.5 102.0 523.5 77.1 715.1 953.5 501.7 451.8 102.0 553.8 97.1 153.7 75.3 64.6 7.6 395.1 9.6 706.0 217.7 87.3 102.1 6.9 309.8 723.7 185.3 81.2 84.5 3.3 428.8 10.0 793.0 244.0 109.3 111.3 8.3 477.5 8.9 959.3 278.8 122.7 130.0 8.0 513.2 7.7 1,060.4 378.6 369.0 466.6 536.8 591.0 31.4 212.2 622.2 83.9 18.3 0.5 411.9 77.2 217.2 663.4 60.3 22.5 0.4 466.2 64.6 250.2 781.4 11.6 22.4 70.3 1.3 525.3 77.1 303.1 916.9 42.3 22.4 1.3 666.6 96.8 332.1 1,019.9 40.5 22.4 1.3 715.1 Total Gross Block Less: Acc. Depreciation Net Block Total CWIP Total Fixed Assets Other Investments Current Asstes Inventory Debtors Loans and Advances Other Current Assets Cash ST Investments Total Current Assets Current Liabilities Creditors Provisions Other CL Total Current Liabilities Net Current Assets Deferred Tax Assets LT loans & Advances Other Non CA Assets side total Source: Company, ICICIdirect.com Research ICICI Securities Ltd | Retail Equity Research Page 22 Exhibit 34: Cash Flow Statement (| Crore) (Year-end March) Profit after Tax Depreciation Interest Paid CF before WC changes Inventory Debtors Loans and Advances Other Current Assets ST Investments Net Increase in CA Creditors Provisions Other CL Net Increase in CL Net CF from operations FY11 405.2 34.2 1.6 441.0 (43.1) (65.5) 52.1 (2.2) (9.6) (68.3) (48.1) (93.4) 212.2 70.7 443.4 FY12 446.5 39.3 1.5 487.3 (64.0) (12.0) (37.4) 0.8 9.6 (103.0) (9.5) 45.8 5.0 41.2 425.5 FY13 496.8 43.7 540.5 32.4 6.1 17.6 3.6 (10.0) 49.6 97.6 (12.6) 33.0 118.1 708.1 FY14E 576.5 49.1 625.6 (58.7) (28.1) (26.8) (5.1) 1.1 (117.5) 70.1 12.4 52.9 135.5 643.6 FY15E 619.6 59.7 679.3 (34.8) (13.4) (18.8) 0.3 1.2 (65.4) 54.2 19.7 29.0 103.0 716.9 Deferred Tax Assets LT loans & Advances Other Non CA Other Investments (Purchase)/Sale of Fixed Assets Other Non Current Liabilities LT Provisions Net CF from Investing (0.4) (0.5) (25.0) (44.4) 0.9 26.9 (42.5) (4.3) 0.1 (13.2) (99.9) (0.1) 3.2 (114.2) 0.1 (69.9) (1.3) 22.1 (102.5) 0.1 4.8 (146.6) 70.3 (40.0) (190.0) (159.7) (20.0) (90.0) (110.0) 0.1 (0.1) Unsecured Loan Interest Paid Total Outflow for dividend Other Adj./(writeoff) in GR Net CF from Financing (4.6) (1.6) (348.9) 1.6 (353.4) (1.5) (395.1) (396.7) (442.6) (442.6) (435.2) (435.2) (571.2) (571.2) Net Cash flow Cash at the beginning Closing Cash 47.6 347.6 395.1 (85.3) 395.1 309.8 119.0 309.8 428.8 48.7 428.8 477.5 35.7 477.5 513.2 Secured Loan - - - Source: Company, ICICIdirect.com Research ICICI Securities Ltd | Retail Equity Research Page 23 Exhibit 35: Ratio Analysis (Year-end March) Per Share Data EPS Cash EPS BV Operating profit per share FY11 FY12 FY13 FY14E FY15E 29.8 32.3 28.2 33.0 32.8 35.7 32.0 42.5 36.5 39.7 36.0 48.3 42.4 46.0 46.4 51.1 45.6 50.0 50.0 63.0 20.2 18.2 21.5 16.6 20.8 15.7 19.3 16.0 20.9 15.1 105.5 108.0 98.4 102.5 123.8 95.8 101.5 125.2 94.6 91.4 102.3 86.5 91.2 117.4 86.7 Valuation Ratios EV / EBITDA P/E (Adjusted) EV / Net Sales Sales / Equity Market Cap / Sales Price to Book Value 37.1 42.3 7.5 5.8 7.7 44.4 28.9 38.2 6.2 6.2 6.3 39.2 25.3 34.3 5.3 6.5 5.4 34.8 23.9 32.5 4.7 5.6 4.8 27.0 19.3 27.5 4.1 6.0 4.2 25.1 Turnover Ratios Asset turnover Debtors Turnover Ratio 6.0 29.5 6.1 30.9 6.4 39.0 6.0 32.6 5.9 33.2 Creditors Turnover Ratio 5.9 7.3 6.8 6.6 6.9 Solvency Ratios Debt / Equity Current Ratio Quick Ratio 0.0 1.1 0.9 1.1 0.8 1.0 0.8 1.0 0.8 1.0 0.8 Operating Ratios EBITDA / Total Operating Income PAT / Total Operating Income Return Ratios RoE RoCE RoA Source: Company, ICICIdirect.com Research ICICI Securities Ltd | Retail Equity Research Page 24 RATING RATIONALE ICICIdirect.com endeavours to provide objective opinions and recommendations. ICICIdirect.com assigns ratings to its stocks according to their notional target price vs. current market price and then categorises them as Strong Buy, Buy, Hold and Sell. The performance horizon is two years unless specified and the notional target price is defined as the analysts' valuation for a stock. Strong Buy: >15%/20% for large caps/midcaps, respectively, with high conviction; Buy: > 10%/ 15% for large caps/midcaps, respectively; Hold: Up to +/-10%; Sell: -10% or more; Pankaj Pandey Head – Research pankaj.pandey@icicisecurities.com ICICIdirect.com Research Desk, ICICI Securities Limited, 1st Floor, Akruti Trade Centre, Road No. 7, MIDC, Andheri (East) Mumbai – 400 093 research@icicidirect.com ANALYST CERTIFICATION We /I, Sanjay Manyal M.B.A.(FINANCE) Parineeta Poddar M.B.A.(FINANCE) research analysts, authors and the names subscribed to this report, hereby certify that all of the views expressed in this research report accurately reflect our personal views about any and all of the subject issuer(s) or securities. We also certify that no part of our compensation was, is, or will be directly or indirectly related to the specific recommendation(s) or view(s) in this report. 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