1QFY2012 Result Update | FMCG

July 22, 2011

Colgate
Performance Highlights
(` cr) Revenue EBITDA OPM (%) PAT 1QFY12 611.1 117.3 19.2 100.4 1QFY11 528.8 139.0 26.3 122.0 % yoy 15.6 (15.6) (709bp) (17.7) Angel est. 602.6 149.3 24.8 128.0 % Diff. 1.4 (21.4) (558bp) (21.5)

REDUCE
CMP Target Price
Investment Period
Stock Info Sector Market Cap (` cr) Beta 52 Week High / Low Avg. Daily Volume Face Value (`) BSE Sensex Nifty Reuters Code Bloomberg Code FMCG 13,497 0.4 1031/783 22,476 1 18,722 5,634 COLG.BO CLGT@IN

`993 `869
12 Months

Source: Company, Angel Research

Colgate reported a weak performance for 1QFY2012. The companys top line grew by 15.6% yoy, 1.4% above our estimates, driven by volumes. Earnings for the quarter declined by 17.7% yoy, owing to a sharp contraction in OPM and higher tax from the manufacturing plant in Baddi. The companys operating margin contracted by 709bp yoy on account of spike in ad spends and other expenses. We maintain our Reduce rating on the stock. Steady growth in oral care: Colgate registered top-line growth of 15.6% yoy, which was completely driven by volumes (registered 12% of overall volumes). The toothpaste category witnessed steady volume growth of 14% yoy, resulting in the volume market share increasing to 53.0%. All core brands, Colgate dental cream, Active Salt, Max Fresh and Cibaca contributed to the top-line growth. In the toothbrush category, Colgates market share increased to 40.0%. Colgate Plax registered strong volume market share growth to 24%. Market shares mentioned are from June 2010May 2011. Outlook and valuation: During FY201113E, we expect Colgate India to report a 14.9% CAGR in its top line (largely volume growth) and have modeled in a 52bp yoy margin contraction due to higher ad spends and lower operating leverage. However, in terms of earnings, we expect Colgate to register a ~13% CAGR for FY2011-13E (~9% in FY2012E) as we model in higher tax rate (26% in FY2012). Hence, we retain our Reduce rating on the stock with a revised target price of `869 (`874), based on 23x FY2013E EPS. Key financials (Consolidated)
Y/E March (` cr) Net sales % chg Net profit (Adj.) % chg EBITDA margin (%) EPS (`) P/E (x) P/BV (x) RoE (%) RoCE (%) EV/Sales (x) EV/EBITDA (x)
Source: Company, Angel Research

Shareholding Pattern (%) Promoters MF / Banks / Indian Fls FII / NRIs / OCBs Indian Public / Others 51.0 8.7 19.2 21.1

Abs. (%) Sensex Colgate

3m (4.5) 9.8

1yr 3.4 16.9

3yr 32.7 170.3

FY2010

FY2011

FY2012E

FY2013E

1,962 15.8 423.3 43.4 21.7 31.1 31.9 41.4 156.1 150.3 6.7 30.9

2,221 13.2 402.6 (4.9) 20.3 29.6 33.5 35.2 113.4 122.5 5.9 29.1

2,550 14.8 438.6 8.9 19.8 32.3 30.8 33.7 111.7 125.0 5.1 25.7

2,931 14.9 513.6 17.1 20.3 37.8 26.3 24.6 108.0 120.8 4.4 21.5 Sreekanth P.V.S
022 3935 7800 Ext: 6841

sreekanth.s@angelbroking.com

Please refer to important disclosures at the end of this report

Colgate | 1QFY2012 Result Update

Exhibit 1: Quarterly performance

Y/E March (` cr) Net Sales Consumption of RM (% of Sales) Staff Cost (% of Sales) Advertising (% of Sales) Other Expenses (% of Sales) Total Exp Operating Profit OPM (%) Interest Depreciation Other Income PBT (excl Ext) Ext Income/(Expenses) PBT (incl Ext) (% of Sales) Prov. for Tax (% of PBT) Recurring PAT PATM (%) Reported PAT Equity Shares (cr) EPS (Rs) 1QFY12 611.1 246.7 40.4 49.8 8.2 98.8 16.2 98.5 16.1 493.8 117.3 19.2 0.6 8.8 30.3 138.1 138.1 22.6 37.7 27.3 130.7 21.4 13.6 7.4 100.4 1QFY11 528.8 196.6 37.2 44.4 8.4 69.4 13.1 79.5 15.0 389.8 139.0 26.3 0.3 7.9 26.3 157.0 157.0 29.7 35.0 22.3 148.3 28.0 13.6 9.0 122.0 (17.7) (17.7) (11.9) 7.6 (12.0) 79.4 10.8 15.1 (12.0) 26.7 (15.6) 24.0 42.3 12.3 % yoy 15.6 25.5 FY2011 2,220.6 872.0 39.3 193.2 8.7 349.3 15.7 355.4 16.0 1,769.9 450.7 20.3 3.3 34.3 106.8 520.0 520.0 23.4 117.4 22.6 509.4 22.9 13.6 29.6 402.6 FY2010 1,962.5 776.8 39.6 159.1 8.1 299.4 15.3 301.4 15.4 1,536.7 425.7 21.7 1.5 37.6 98.1 484.8 484.8 24.7 61.5 12.7 521.4 26.6 13.6 31.1 423.3 (4.9) (4.9) (2.3) 90.7 7.3 119.3 (8.8) 8.8 7.3 15.2 5.9 17.9 16.7 21.5 % chg 13.2 12.2

Source: Company, Angel Research

Top-line growth slightly above estimates, volume growth at 12%

Colgate posted modest top-line growth of 15.6% yoy to `611cr (`529cr), marginally above our estimates, led by steady 12% volume growth in its core toothpaste category. All core brands, Colgate dental cream, Active Salt, Max Fresh and Cibaca contributed to the top-line growth. In the toothbrush category, Colgates market share increased to 40.0%. Colgate Plax registered strong volume market share growth to 24%. Market shares mentioned are from June 2010May 2011. The company has recently launched premium products Colgate Sensitive Pro-Relief Toothpaste, which provides instant and lasting sensitivity relief, and Colgate 360 Sensitive Pro-Relief Toothbrush in the toothpaste and toothbrush categories. The company has also launched other premium products such as Colgate Plax Sensitive Mouthwash and Colgate Plax Complete Care Mouthwash.

July 22, 2011

Colgate | 1QFY2012 Result Update

Exhibit 2: Top-line growth steady led by volume growth

700 600 500
(`cr)

Exhibit 3: Maintains market share in all categories...

55.0 50.0 45.0
(yoy %)

18.1 14.8

17.0

13.4

12.6 13.0 13.2 13.8

15.6

20.0 15.0

400 300 200 100 1Q10 2Q10 3Q10 4Q10 1Q11 2Q11 3Q11 4Q11 1Q12

552 558 582 611 468 487 491 517 529

(%)

10.0 5.0 -

40.0 35.0 30.0 25.0 Toothpaste Toothbrush Toothpowder

Top-line (LHS)

yoygrowth (RHS)

1Q11

2Q11

3Q11

4Q11

1Q12

Source: Company, Angel research

Source: Company, Angel research

Earnings declined by 17.7%, leading to a steep fall in OPM

Colgates earnings for the quarter registered a decline of 17.7% yoy to `100cr (`122cr), beating our estimates by 21.5%, despite a 15% jump in other income and lower depreciation cost. High other expenses on account of new product launches dragged the earnings.

Exhibit 4: Earnings show a sharp decline...

130 110 90
(` cr)

Exhibit 5: ...high ad spends pull down the OPM

60.0 40.0 80.0 70.0 60.0 50.0 40.0 30.0 20.0 10.0 70.1 56.2 57.4 57.2 62.8 60.1 61.3 58.9 59.6

42.9 41.3 49.7 39.6 18.7 11.8 (0.3) (17.7) (43.1)

20.0
(yoy %)

70 50 30 10
1Q10 2Q10 3Q10 4Q10 1Q11 2Q11 3Q11 4Q11

(20.0) (40.0) (60.0)

(%)

22.5 19.5 20.6 24.1 26.3 20.3 12.5 16.9 15.3 16.1
1Q10 2Q10 3Q10 4Q10

13.4 21.6
3Q11

21.5 19.2 13.8 16.2

4Q11 1Q12

13.114.3
1Q11 2Q11

1Q12

PAT (LHS)

yoy growth (RHS)

OPM

Gross margin

A&P spends

Source: Company, Angel Research

Source: Company, Angel Research

July 22, 2011

Colgate | 1QFY2012 Result Update

OPM a shocker contracts 709bp yoy led by very high ad spends

On the operating front, the company delivered a sharp margin contraction of 709bp yoy to 19.2% (26.3%), significantly below of our estimates, largely on account of a sharp jump in ad spends due to launch of premium products. The companys gross margin contracted by 319bp yoy on account of high raw-material costs. Colgate has been under high raw-material price pressure for the past many quarters.

Investment concerns
Oral care category witnessing high levels of competition: We believe competition in the oral care category is set to intensify for all players, Colgate has launched premium products such as Colgate Sensitive Pro-Relief toothpaste and Colgate 360 Sensitive Pro-Relief toothbrush post Glaxos launch of Sensodyne and HUL showing aggression through product launches and higher ad spends. We also expect P&G to intensify competition in India as it is doing globally. This could lead to much higher ad spends and affect Colgates profitability. Limited earnings growth and OPM under pressure: As expected, Colgate is witnessing a slippage in margins from FY2010. While we have modeled in a margin contraction of 52bp for FY2012E, we highlight the same is at risk to 1) higher excise duty due to further roll-back, 2) rise in competitive intensity and 3) deterioration in product mix. Moreover, we have modeled in higher tax rate in FY201113E at 26%, as income tax benefits at the Baddi facility reduce from 100% to 30%. Expensive valuations for muted earnings CAGR: At the CMP of `993, the stock is trading at P/E of 26.3x FY2013E EPS, which we believe is very expensive. In terms of earnings growth, we do not expect any positive surprises.

July 22, 2011

Colgate | 1QFY2012 Result Update

Outlook and valuation

We have revised our estimates downwards owning to the increase in raw-material cost, high ad spends due to new product launches and increased tax rates. At the CMP, the stock is trading at 26.3x FY2013E EPS. Hence,
we retain our Reduce rating on the stock with a revised target price of `869 (`874), based on 23x FY2013E EPS.

Exhibit 6: Change in estimates

Old estimates (` cr) Revenue OPM (%) EPS FY2012E FY2013E New estimates FY2012E FY2013E % chg FY2012E FY2013E

2,564 20.1 33.7

2,966 20.8 38.8

2,550 19.8 32.3

2,931 20.3 37.8

(0.6) (32) (4.4)

(1.2) (43) (2.7)

Source: Company, Angel Research

Exhibit 7: Peer valuation

Company
Asian Paints Britannia Colgate Dabur GSKCHL GCPL HUL ITC Marico Nestle

Reco.
Neutral Neutral Reduce Accumulate Reduce Neutral Neutral Neutral Reduce Reduce
#

Mcap (` cr)
29,800 5,735 13,497 19,409 9,947 14,670 72,847 160,411 9,892 42,377

CMP (`)
3,107 480 993 112 2,365 453 334 207 161 4,395

TP (`)
869 119 2,163 147 3,483

Upside (%)
(14) 7 (9) (9) (21)

P/E (x) FY12E

30.3 31.1 30.8 26.3 28.6 25.4 28.6 27.7 32.8 43.5

EV/Sales (x) FY12E

3.2 1.1 5.1 3.8 3.3 3.8 3.1 6.2 3.0 5.8

RoE (%) FY12E

39.6 37.8 111.7 46.7 32.6 37.2 74.8 32.7 29.6 91.1

CAGR # Sales
17.3 17.3 14.9 21.6 17.3 13.4 12.5 17.6 12.0 16.1

FY13E
24.6 21.3 26.3 22.4 24.1 22.2 25.0 23.3 26.5 36.6

FY13E
2.7 1.0 4.4 3.3 2.8 3.3 2.8 5.2 2.7 5.0

FY13E
38.3 46.1 108.0 43.3 31.8 28.0 74.6 31.5 27.9 72.9

PAT
19.8 36.0 12.9 21.3 17.5 17.2 17.1 17.4 25.3 18.9

Source: Company, Angel Research, Denotes CAGR for FY201113E

Exhibit 8: Angel vs. Consensus estimates

Top line (` cr) Angel estimates Consensus Diff. (%)
Source: Company, Angel Research

FY2012E 2,550 2,616 (2.5)

FY2013E 2,931 2,983 (1.8)

EPS (`) Angel estimates Consensus Diff (%)

FY2012E 32.3 34.4 (6.2)

FY2012E 37.8 39.7 (4.9)

July 22, 2011

Colgate | 1QFY2012 Result Update

Exhibit 9: Return of Colgate vs. Sensex

210% 190%
Sensex Colgate

Exhibit 10: One-year forward P/E band

1,200 1,000
15x 18x 21x 24x

Share Price (`)

170% 150% 130% 110% 90%

800 600 400 200 -

Dec-05

Dec-07

Dec-09

Apr-05

Apr-07

Apr-09

Aug-06

Aug-08

Oct-10

Sep-10

Nov-10

Feb-11

May-11

Dec-10

Jan-11

Aug-10

Mar-11

Apr-11

Jun-11

Source: Company, Angel Research

Source: Company, Angel Research

Exhibit 11: One-year forward P/E

45.0 40.0 35.0 30.0 25.0 20.0 15.0 10.0 5.0 -

Exhibit 12: One-year forward Premium vs. Sensex

160% 140% 120% 100% 80% 60% 40% 20% 0% -20% -40%

Nov-05 Mar-06 Jul-06 Nov-06 Mar-07 Jul-07 Nov-07 Mar-08 Jul-08 Nov-08 Mar-09 Jul-09 Nov-09 Mar-10 Jul-10

Nov-10 Mar-11 Jul-11

Jul-05

Source: Company, Angel Research

Source: Company, Angel Research

July 22, 2011

Apr-02 Oct-02 Apr-03 Oct-03 Apr-04 Oct-04 Apr-05 Oct-05 Apr-06 Oct-06 Apr-07 Oct-07 Apr-08 Oct-08 Apr-09 Oct-09 Apr-10 Oct-10 Apr-11

Aug-10

Jul-10

Apr-11

Colgate | 1QFY2012 Result Update

Profit & Loss statement

Y/E March (` cr) Gross sales Less: Excise duty Net Sales Total operating income % chg Total Expenditure Cost of Materials Advertising Exp (Incl Promotion) Personnel Others EBITDA % chg (% of Net Sales) Depreciation& Amortisation EBIT % chg (% of Net Sales) Interest & other Charges Other Income (% of PBT) Share in profit of Associates Recurring PBT % chg Prior Period & Extra. Exp./(Inc.) PBT (reported) Tax (% of PBT) PAT (reported) Add: Share of earnings of asso. Less: Minority interest (MI) PAT after MI (reported) ADJ. PAT % chg (% of Net Sales) Basic EPS (`) Fully Diluted EPS (`) % chg FY2008 FY2009 FY2010 FY2011 FY2012E FY2013E 1,553 80 1,473 1,473 13.8 1,244 633 257 117 237 230 9.9 15.6 20 210 8.3 14.2 1 85 28.9 293 12.9 1 292 60 20.6 233 233 232 44.7 15.7 17.1 17.1 6.7 1,758 63 1,695 1,695 15.0 1,428 741 272 139 277 266 16.1 15.7 23 244 16.1 14.4 1 108 30.8 350 19.5 5 345 55 15.7 295 295 290 25.3 17.1 21.7 21.7 26.8 2,025 62 1,962 1,962 15.8 1,537 777 299 159 302 425 59.7 21.7 38 388 59.3 19.8 2 98 20.3 485 38.4 485 62 12.7 423 423 423 45.8 21.6 31.1 31.1 43.4 2,317 97 2,221 2,221 13.2 1,770 872 349 193 355 451 6.0 20.3 34 416 7.4 18.8 3 107 20.5 520 7.3 520 117 22.6 403 403 403 (4.9) 18.1 29.6 29.6 (4.9) 2,657 107 2,550 2,550 14.8 2,046 1,013 408 214 411 504 11.9 19.8 35 470 12.8 18.4 4 126 21.3 593 14.0 593 154 26.0 439 439 439 8.9 17.2 32.3 32.3 8.9 3,060 129 2,931 2,931 14.9 2,335 1,140 469 248 478 596 18.2 20.3 42 554 18.0 18.9 4 143 20.7 694 17.1 694 180 26.0 514 514 514 17.1 17.5 37.8 37.8 17.1

July 22, 2011

Colgate | 1QFY2012 Result Update

Balance sheet
Y/E March (` cr) SOURCES OF FUNDS Equity Share Capital Preference Capital Reserves& Surplus Shareholders Funds Minority Interest Total Loans Deferred Tax Liability Total Liabilities APPLICATION OF FUNDS Gross Block Less: Acc. Depreciation Net Block Capital Work-in-Progress Goodwill Investments Current Assets Cash Loans & Advances Other Current liabilities Net Current Assets Mis. Exp. not written off Total Assets 409 258 151 8 41 73 402 144 173 85 534 (133) 139 384 251 133 5 41 38 538 251 193 94 551 (14) 203 494 288 206 6 41 21 591 348 123 120 552 39 313 539 325 214 12 41 39 704 396 112 197 643 61 367 567 359 207 11 41 39 795 526 129 140 709 86 384 666 401 265 13 41 39 977 681 143 153 802 175 533 14 149 162 5 (28) 139 14 203 216 5 (18) 203 14 313 326 5 (18) 313 14 370 384 0 (17) 367 14 388 401 0 (17) 384 14 536 550 0 (17) 533 FY2008 FY2009 FY2010 FY2011 FY2012E FY2013E

Cash Flow Statement

Y/E March (` cr) Profit before tax Depreciation Change in Working Capital Interest / Dividend (Net) Direct taxes paid Others Cash Flow from Operations (Inc.)/ Dec. in Fixed Assets (Inc.)/ Dec. in Investments Cash Flow from Investing Issue of Equity Inc./(Dec.) in loans Dividend Paid (Incl. Tax) Interest / Dividend (Net) Cash Flow from Financing Inc./(Dec.) in Cash Opening Cash balances Closing Cash balances FY2008 FY2009 FY2010 292 20 41 (20) 60 (25) 248 (21) 61 39 (122) 0 153 (20) (255) 33 112 144 345 23 35 (34) 55 (46) 268 9 34 43 0 0 238 (34) (204) 107 144 251 485 38 (23) (24) 62 70 484 (111) 17 (93) 0 (0) 318 (24) (294) 96 251 348 FY2011 FY2012E FY2013E 520 34 4 (27) 117 31 446 (51) (18) (69) 0 (5) 351 (27) (329) 48 348 396 593 35 119 (38) 154 (82) 473 (27) 0 (27) 0 0 349 (34) (316) 131 396 526 694 42 59 (48) 180 11 579 (101) 0 (101) 0 0 365 (43) (323) 155 526 681

July 22, 2011

Colgate | 1QFY2012 Result Update

Key Ratios
Y/E March Valuation Ratio (x) P/E (on FDEPS) P/CEPS P/BV Dividend yield (%) EV/Sales EV/EBITDA EV / Total Assets Per Share Data (Rs) EPS (Basic) EPS (fully diluted) Cash EPS DPS Book Value Returns (%) RoCE Angel ROIC (Pre-tax) RoE Turnover ratios (x) Asset Turnover (Gross Block) Inventory / Sales (days) Receivables (days) Payables (days) WCcycle (ex-cash) (days) 3.8 19 2 86 (69) 4.3 18 2 85 (57) 4.5 21 2 79 (57) 4.3 25 7 78 (55) 4.6 18 2 80 (63) 4.8 17 2 80 (63) 105.3 104.7 142.2 153.3 150.3 156.1 122.5 113.4 125.0 111.7 120.8 108.0 17.1 17.1 18.5 13.0 11.9 21.7 21.7 23.0 15.0 15.9 31.1 31.1 33.9 20.0 24.0 29.6 29.6 32.1 22.1 28.2 32.3 32.3 34.8 22.0 29.5 37.8 37.8 40.8 23.0 40.4 58.0 53.7 83.2 1.3 9.1 63.6 95.9 45.7 43.1 62.4 1.5 7.8 54.3 65.1 31.9 29.3 41.4 2.0 6.7 33.9 42.0 33.5 30.9 35.1 2.2 5.9 31.4 35.7 30.8 28.5 33.6 2.2 5.1 27.6 33.7 26.3 24.3 24.5 2.3 4.4 23.1 24.0 FY2008 FY2009 FY2010 FY2011E FY2012E FY2013E

July 22, 2011

Colgate | 1QFY2012 Result Update

Research Team Tel: 022 - 39357800

E-mail: research@angelbroking.com

Website: www.angelbroking.com

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Disclosure of Interest Statement 1. Analyst ownership of the stock 2. Angel and its Group companies ownership of the stock 3. Angel and its Group companies' Directors ownership of the stock 4. Broking relationship with company covered

Colgate No No No No

Note: We have not considered any Exposure below ` 1 lakh for Angel, its Group companies and Directors

Ratings (Returns):
July 22, 2011

Buy (> 15%) Reduce (-5% to 15%)

Accumulate (5% to 15%) Sell (< -15%)

Neutral (-5 to 5%) 10