Colgate-Palmolive (India) Ltd Q3FY10 results are above our estimates with adjusted profit after tax (PAT) up 36.2% year-on-year (y-o-y) at Rs106 crore. Sales grew 17% to Rs490 crore led by 13% volume growth; toothpaste volumes grew 15% (Q2FY10 volume up 18%).
Q3FY10 volume growth of toothpaste is 15% as the toothpaste market continued to post robust growth due to a penetration-led strategy. The management strategy of focusing on small packs of Rs10 boosted volume growth for the company. The trend of up-trading from tooth powder to toothpaste has caught momentum and Colgate is best placed to capitalize on this.
Graphic: Yogesh Kumar / Mint
All major brands such as Colgate Dental Cream, Active Salt and Cibaca contributed significantly to volume.
The volume market share increased to 52.4% over January-December 2009 (against 52% during January-September 2009). January-December 2009 toothbrush volume share increased to 39.5% and tooth powder volume share was 48.4%. Colgate has been gradually increasing its market share in the toothpaste and toothbrush markets.
Much of the gains came at the expense of Hindustan Unilever Ltd as it does not have a presence in the entry-level toothpaste segment. We note that the Rs10 stock-keeping unit (SKU) has been well received in rural markets, enabling higher first-time use. Besides, a cross-section of rural consumers is directly upgrading to toothpaste instead of first going to tooth powder. Increased affordability at the entry level and success of Rs10 price point has been a major growth driver. Cibaca continues to grow faster than Colgate Dental Cream.
Gross margins expanded by 130 basis points (bps) y-o-y (down 20 bps quarter-on-quarter) due to lower input costs and excise benefits. Prices of major inputs such as laminated tubes and sorbitol oil were lower than they were a year earlier, which enabled margin expansion.
Ad spends in Q3FY10 increased 430 bps y-o-y as Colgate concluded an extended oral health month (an annual consumer activation campaign along with the Indian Dental Association on increasing oral health awareness). Strong volume growth traction led Colgate to extend the campaign to two months (September and October) instead of one month earlier.
We expect volume growth to sustain in the coming quarters. However, it is unlikely to accelerate significantly from the current levels. We are upgrading our estimates for FY10, FY11 and FY12 by 6.6%, 3.4% and 4.2% to Rs28.8 (Rs27.1 earlier), Rs32 (Rs31 earlier) and Rs38 (Rs36.5 earlier), respectively.
Colgate continues to be the best company in the oral care segment in India.
We believe oral care penetration is rising fast. Besides, the consumer’s direct migration to toothpastes and increasing product affordability make the story attractive in the next few years.
FY11 profit after tax growth is expected to be affected by a sharp increase in the tax rate from 17% to 25% with the Baddi unit moving from 100% tax exemption to 30%. With the long-term outlook intact, we maintain a buy.