For 1QFY2010, Colgate declared a topline growth of 14.8% y-o-y to Rs468 crore (Rs408cr) in line with our expectation of 14.5% growth to Rs467 crore.
This growth was driven by a steady volume growth of 12% y-o-y, with a strong 14% y-o-y volume growth registered in the Toothpaste category, and marketshare gains (improved to 52.3% in volume terms during Jan-May 2009).
All major brands like Colgate Dental cream, Max Fresh, Active Salt and the economy variant, Cibaca, continue to contribute to the company’s overall volume growth. In the Toothbrush category, Colgate increased its marketshare to 38.2%.
In Toothpowder Segment, the company reinforced its leadership position by increasing its marketshare to 48.8% during Jan-May 2009.
We are positively surprised with the strong earnings growth posted by Colgate during the quarter, albeit due to reductions in advertising spends.
However, steady volume growth and consistent marketshare gains during the last several quarters, despite cuts in ad spends, is indicative of Colgate’s strengthening position in the Oral care market and benign competitive scenario.
Hence, we have marginally tweaked our numbers on the topline front and revised our Earnings estimates for FY2010E and FY2011E by 4.3% and 4% respectively, to account for lower ad-spends and better cost management.
During FY2009-11E, we expect Colgate India to report a CAGR of 14.5% in topline backed by an overall volume growth of 10-11% and value growth of 3-4% (driven by price hikes and improvement in product mix), new product launches (particularly under the Palmolive brand) and heavy investments in building brand equity.
On the Operating front, we expect margins to expand by 141bp during the period aided by a benign input cost environment and significant savings in ad spends (lower media rates and lower competitive scenario), driving a steady 19.6% CAGR in EBITDA during the period.
Earnings (Net Profit adjusted for exceptional items) are expected to post a CAGR of 16.6% owing to steady topline growth and Margin expansion. Moreover, Tax savings (owing to higher production from the Baddi facility) will further aid the company’s Bottom-line.
Given Colgate’s strong parentage and leadership position in the Oral Care market in India coupled with its ability to withstand competitive pressures (as witnessed in constant marketshare gains), we remain bullish on the future performance of the company.
At Rs644, the stock is trading at 22.2x FY2011E revised EPS of Rs29. However, owing to the recent run up in stock price and expensive valuations, we believe upside from current levels is capped.
Hence, we recommend a NEUTRAL view on the stock.