For Q1FY2009, Colgate Palmolive (India) posted a healthy topline growth of 16.2% y-o-y to Rs408 crore (Rs351), marginally above our estimate of a 14.2% growth to Rs400 crore.
The growth was led by an 11.5% overall volumes increase supported by a 10.9% volume growth in its core toothpaste category.
During FY2008-10E, we expect the company to report a CAGR growth of 13.7% in topline backed by an overall volume growth of 9-10%, new product launches (particularly under the Palmolive brand) and marginal price hikes.
On the operating front, CAGR growth is pegged at 17.5% in EBITDA, largely supported by higher operating leverage and cost efficiencies as staff costs and advertising expenses are expected to remain steady.
Earnings growth (Net Profit adjusted for exceptional items) is expected to grow at a lower CAGR of 14.7% owing to lower growth in other income on back of disposal of surplus cash as special dividend under the capital reduction scheme undertaken by the company.
However, higher-than-expected tax savings (owing to higher production from the Baddi facility) entails an upside risk to our estimates.
Given Colgate’s strong parentage and leadership position in the oral care market in India coupled with its ability to withstand competitive pressure (as witnessed in constant market share gains), we remain bullish on the future performance of the company.
However, escalating input costs (particularly inflationary trend in packaging material) coupled with high advertising expenses remain the key risk to our margin estimates. At the current market price, the stock trades at a modest 15.5x FY2010E EPS of Rs22.5.
Moreover, a 4.3% dividend yield (FY2009E) provides additional cushion to the stock, mitigating downside risks. We maintain BUY, with a target price of Rs448.