market cap: rs cr - s3.amazonaws.coms3.amazonaws.com/zanran_storage/ · colgate dental cream,...

TEAM ID – 1003 Colgate

Recommendation: SELL Market Cap: Rs Cr. 5,166.64

Colgate-Palmolive is the leader in the Rs. 3000 crore oral care industry, with dominance in all the three major segments viz. toothpaste, toothpowder and toothbrush. H I G H L I G H T S: The company is expected to increase its topline at

a pace faster than the industry average. This is due

to successful launch of new products and better

price realizations. It is expected to grow at 12%

(CAGR FY06-10)

The bottom line of the company is expected to

increase at a faster rate, thanks to the shift of

production to an excise and tax free facility. The

net profit margins are expected to increase by 261

basis points from FY2006-10

Using the discounted cash flow model, we arrive

at an intrinsic value of Rs 255.50 per share. This

is way below the CMP. Using the Intrinsic P/E

methodology, we arrive at a value of Rs. 267.57,

again a significant discount to the CMP

Using the reverse DCF method, the market

expects the company’s topline to grow by 14%

p.a. and its FCF to grow by 11% p.a. (assuming

terminal FCF growth of 5%). This growth is not

sustainable in the current market environment

Price: Rs. 379.90

12 Month Price Objective: Rs. 255.50

Estimates 2007E 2008E 2009E

Net income (Rs. mn)

1,593.0

2,134.6

2,357.7

EPS 11.71 15.70 17.34

P/E 32.43 24.20 21.91

EPS Growth % 20.3% 34.0% 10.4%

EV/EBITDA 23.78 18.93 16.74

ROE 54.6% 66.9% 67.6%

Investment Argument

The company’s expected growth in

sales and profits does not support the

current share price. Although, the

company is expected to increase

profits significantly, the stock is still

highly overvalued at current levels

The company is highly dependant on

oral care (95% of sales), thus

increasing the risk. Further

competition is expected to increase in

the future with the rise of private

labels.

COMPANY BACKGROUND

Source: www.capitaline.com

Colgate Palmolive India is a 51 % subsidiary of Colgate Palmolive Company, USA. It is

the market leader in the Indian oral care market, with a 51 % market share in the

toothpaste segment, 48 % market share in the toothpowder market and 30 % share in the

toothbrush market. It is a top player in the oral care segment in India and its most

prominent brand, Colgate Dental Cream has become synonymous with the product

category. The company also has a presence in the premium toilet soap segment and in

shaving products, which are sold under the Palmolive brand. Other well-known consumer

brands include Charmis skin cream and Axion dish wash. The company's strategy is to

focus on growing volumes by improving penetration through aggressive campaigning and

consumer promotions. Margin gains are being targeted through efficient supply chain

management and bringing down cost of operations. Colgate has managed to maintain its

leadership position in the oral care segment and increase its EPS in spite of growing

competition in the past few years.

60.00

80.00

100.00

120.00

140.00

160.00

180.00

02/12/2005 01/03/2006 30/05/2006 23/08/2006 17/11/2006

ColgateBSE SensexBSE FMCG Index

Source: www.colgate.co.in


OWNERSHIP PATTERN

The company is promoted by its parent company Colgate Palmolive, USA and 51% of it

stock is owned by its parent company.

Source: www.bseindia.com

NET PROFIT

88.66108 113.26

137.6

020406080

100120140160

Mar 03(12) Mar 04(12) Mar 05(12) Mar 06(12)

YEAR

In R

s. c

r

EPS

6.267.17 7.4

9.07

0

2

4

6

8

10

Mar 03(12) Mar 04(12) Mar 05(12) Mar 06(12)

Year

in R

s.

HOLDING DETAILS

51

3.0710.57

35.36 promotersMF/FIsFIIsPublic and Others

MANAGEMENT OF THE COMPANY

Colgate is a professionally managed company, with Mr. Roger Calmeyer leading the

company since Jun 2006. Colgate has a team of people who have varied domestic and

foreign experience.


As one of the world's most widely recognized consumer brands and one of India's best

employers, Colgate attracts the country's best talent at various levels. It provides training

and development to enhance and develop the skills of its employees and follows a merit

based approach to reward talent.

Even while closing down its Sewri plant and Nepal subsidiary, it provided VRS to its

workers and employees. In Nepal, the political instability and deteriorating political

situation is a source of concern to the company and it has taken steps to protect its assets

and its people.

PRODUCTS ANALYSIS

Colgate is present in 2 segments in India:

• Oral care

• Personal and home care

Mr. Roger Calmeyer

VP South Asia and MD, India

Moses A Elias

Exec VP and CFO

K Vaidyanathan

VP and Company Secretary

Debashish Roy

VP Human Resources

Vinay Hegde

Exec VP Marketing

Shekar Bharadwaj

VP Sales

Arun Pande

VP Info Technology

Surendra Manek

VP

R&D

Lawrence Wheeler

Exec VP

Manu. And Supply Chain

Source: Company Data and Team Estimates

The company derives 90% of its revenues from the oral care segment consisting of

toothpaste, toothpowder and toothbrush. In the personal segment the company’s offerings

include shower gel and cream, liquid hand wash, shaving cream, skin cream and dish

wash.

ORAL CARE

Toothpastes

Colgate Dental Cream, Colgate Total 12, Colgate Max Fresh, Colgate

Kids Toothpaste, Colgate Fresh Energy Gel, Colgate Herbal, Colgate

Cibaca Family Protection, Colgate Advanced Whitening, Colgate

Active Salt

Toothbrushes

Colgate Kids, Colgate 360, Colgate Navigator Plus, Colgate

Sensitive, Colgate Super Junior Flexible, Colgate Extra Clean,

Colgate Cibaca Top, Colgate Motion, Colgate Massager, Colgate

Super Child Flexible, Colgate Super Flexible, Colgate Zig Zag Junior,

Colgate Zig Zag, Colgate Zig Zag Plus

Toothpowder Colgate Toothpowder

PERSONAL CARE

Shower Gel Palmolive Aroma Shower Gel( Sensual, Relax, Vitality)

Shower Crème Palmolive Aroma Creme( Exotic and Calming)

Bar Soaps Palmolive Aroma Soap (Revive and Relax)

Revenue Break Up

72%

14%

9% 3% 2%

ToothpasteToothpowderToothbrushShaving CreamOthers

Liquid Hand

Wash Palmolive Aroma Liquid Hand Wash

Shaving Cream Palmolive Shave Cream

Skin Cream Palmolive Charmis Cream

HOUSEHOLD CARE

Dish Wash Axion Dish Washing Paste


In addition to these products, Colgate also has oral pharmaceuticals products for mouth

ulcer, tooth whitening, sensitivity treatment etc.

INDUSTRY ANALYSIS

Analysis of the Toothpaste Market in India

The toothpaste market in India is worth around Rs. 2200-2500 cr. with a penetration of

around 50%.

Source: www.ibef.org

With only 50% of the population using toothpastes, per capita usage of toothpaste is

much lower than even countries like China and Malaysia. India’s per capita consumption

of toothpaste is 90 gms per month whereas that of China and Malaysia is 219 and 285

gms per month.

However, the category has been growing and the penetration of both dentrifices and

toothpastes has been increasing over the past few years.


With rise in per capita incomes and awareness of oral hygiene, the growth potential is

huge. Lower price and smaller packs are also likely to drive potential uptrading.

The penetration levels have increased from 46% in 2004 to 51% in H1 2006. If we take

population as constant there has been a CAGR of 7.12% from 2004 to H1 2006. The

population of India is growing at an average annual growth rate of 1.6%. Thus, taking

both these effects into consideration, we expect volumes of the toothpaste industry to

grow by 8.84% p.a. in the near future.

Competitor Analysis:

Colgate has been present in the domestic oral care market for the past 70 years and its

brand name ‘Colgate’ is synonymous with its product category. It occupies a dominant

position with 48% market share and its relative market share is 1.5 times the second

player, HLL. HLL and Colgate control around 80% of the market with their 2 prominent

toothpaste brands, Colgate and Pepsodent. Recently, with the acquisition of Balsara

Dabur has managed to capture 7.2% of the market share and emerge as the third player.

There are essentially 2 price points in this category. The normal segment consists of

brands like Colgate, Pepsodent, Close-Up, Meswak, Vicco etc, whereas the low price

segment has brands like Cibaca, Anchor and Babool.

The company has launched 3 new products during the year – Colgate Active Salt,

CATEGORY PENETRATION

0

10

20

30

40

50

60

70

80

2001 2002 2003 2004 2005 H1 2006

YEAR

%

TooothpasteDentrifice

Colgate Advanced Whitening and Colgate Max Fresh Gel. These new releases along with

a 4% hike in prices during the year have helped Colgate post 13.5% hike in sales.

Source: Analyst Reports

Analysis of the Toothpowder Market in India

The toothpowder market in India is worth around Rs. 250 cr. and Colgate is the market

leader in this segment with 44% market share. Its relative share is around 1.5 times the

second player, Dabur.

However, this market is declining, with penetration levels remaining at 35% for the last 3

years. This is primarily because people are shifting to toothpaste.


Toothpowder Penetration

34.434.634.8

3535.235.435.635.8

3636.2

2001 2002 2003 2004 2005 H1 2006

Year

% Toothpowder

Since the penetration levels have remained stagnant over the past few years, we do not

expect any major growth in this segment. We have taken a CAGR of 1.6% for this

segment considering the rise in volume only due to population growth.

Analysis of the Toothbrush Market in India

Colgate is the leader in the toothbrush category with 34% market share and almost 2

times bigger than the next player in the market. The toothbrush market is worth around

Rs. 500 cr. its competitors include Dabur, Gillette and smaller players like Anchor.

To estimate the likely growth in the toothbrush segment, we have assumed the

penetration levels of the toothbrush segment to be the same as that of the toothpaste

segment. Thus we are assuming that the brush segment would continue to grow at the

same pace as the toothpaste segment i.e. 8.84%

Other Product Categories

In addition to the above segments, Colgate also has products such as shaving cream,

shower gel, skin cream, liquid hand soap and dish wash paste. Also Colgate exports

around Rs. 6 cr. worth of products which amounts to around 0.5% of its total turnover.

CATEGORY

VALUE

SHARE (%) RANKING RELATIVE SHARE

Toothpaste 47.60 1 1.6

Toothpowder 43.80 1 1.5

Toothbrush 34.30 1 2.1

Shower Gel 39.60 2 0.8

Liquid Hand Soap 3.60 3 0.2

Shaving Cream 11.00 3 0.6

Cold Cream 4.20 4 0.1


DISTRIBUTION SYSTEM OF COLGATE

A strong distribution network is the key to the success of an FMCG firm. Colgate has

backed its products with a robust country-wide distribution network. Colgate is the

second most widely distributed product of the company. It is further trying to improve its

reach by tying up E-Choupal and Disha.

SWOT ANALYSIS

Strengths:

• One of the biggest strength of the company is the ‘Colgate’ brand. This brand has

become synonymous with toothpaste and this creates a formidable entry barrier for

other firms to enter the toothpaste segment

• Colgate is the market leader in oral care in India with almost 50% share. Its share is

1.5 times the second largest player, HLL. In the toothpowder segment too, its relative

share is 1.5 times the second largest player, Dabur.

Weaknesses:

• Colgate derives almost 90% of its revenues from oral care business. Thus the profits

of the company are totally dependant on one segment. However, it can change this by

bringing out products under the personal care. Colgate has started moving in this

direction by introducing products under the high-end products like shower gel and

soap bars under the brand Palmolive Aroma Therapy

Opportunity

• Although 75% of the households use toothpaste in urban areas, in the rural areas the

penetration level is still at 40%. Toothpaste consumption in India is very low at 92

grams per household per month as against 219 grams per household per month in

China.

Threats

• Competition is increasing from Dabur since has acquired Balsara. Dabur has become

the third largest player in the toothpaste segment with brands like Babool, Meswak

and Promise and it currently commands a market share of 7.2%.

ASSUMPTIONS

Industry Growth Assumptions Colgate-Palmolive is a FMCG company but is primarily in the oral care industry. Oral

care accounts for over 95% of its gross revenues. The forecasts (for volumes only) for the

various sub-segments within the industry take into account the following:

• Penetration levels: The penetration in the various sub-segments is expected to

increase at historical levels (2004-2006H1; Sourced from Colgate investor

presentation)

• Population Growth: Expected Indian population growth for the years 2006-10

(sourced from US Census Bureau)

• Toothbrush industry: The segment has been assumed to increase at the same pace

as the toothpaste industry. This is because, as the penetration levels for the latter

increase, people switch over to toothbrushes. Also reliable penetration numbers

for toothbrushes were not available

• Shaving Cream: The growth forecasts have been taken from two sources, Enam

and FICCI. There was a slight variation, between the two, hence an average of the

two has been taken

Company Growth Assumptions The company growth has been forecasted based on the following factors:

• Industry Growth: The forecasted industry growth for the various sub-segments

• Pricing: Colgate is expected to benefit from price increases in certain categories.

This assumption is based on historical trend (over the last 6 quarters) and analyst

expectations. However the pricing leverage is expected to tighten in the future, as

competition from private labels is expected to increase in the FMCG space (AC

Nielsen study)

• Gain in Market Share: The company is assumed to continue (at a decreasing pace)

any market share gains/losses it has made historically (FY2004-YTD2006)

• Excise Savings: The Company’s net sales are expected to increase as its

toothpaste manufacturing plant is situated in tax free zone and is expected to go

on full production in 2007. Further it has been assumed that the company will

scale up of the facility in the near future (based on analyst expectations and

economic judgment)

Earnings Model Assumptions

• For 2007, the raw material, advertisement and the overheads costs (% of net sales)

are expected to be in line with the H1 2007 results

• Going forward, the raw material and the overhead costs are expected to grow at

the company’s volumes growth

• The advertisement & selling expenses (% of net sales) are expected to be in line

with the average of the last four quarters

• In 2007, the company is expected to make a capital expenditure of Rs. 500 million

to expand the Baddi plant. The company is expected to make only routine capital

expenditure over rest of the forecast horizon

• The company is expected to save income tax with the increased scale of

production from it’s Baddi plant (situated in a tax free zone in Himachal Pradesh)

• The company is expected to follow a consistent dividend policy, maintaining the

same payout ratio as followed in FY2006

Valuation Methods There are two main valuation methodologies that have been used in our report

• Discounted Cash Flow: This model forecasts the free cash flow generated by the

company and then takes out the present value of the cash flows using the

weighted average cost of capital (WACC) for the company. This model is based

on the premise that share price of a company should be equivalent to the present

value of the future earnings of the company

• Intrinsic P/E: The intrinsic P/E model examines the forecasted earnings and

growth rate, to determine the fundamental or intrinsic P/E value for a stock. The

P/E value has two components: the cost of equity for the company and the growth

factor. The former is calculated, on the basis of the capital asset pricing model

(CAPM), while the latter is based on the future growth potential of the company

Po/E1 (Implied P/E) = 1/E(R) + FF*G;

G = g/(E(R) - g);

FF = 1/E(R) - 1/ROE;

Where,

– Po/E1 is the Implied P/E

– E(R) is the cost of equity

– g is the growth factor, calculated as ROE*b

– ROE is the Return on Equity for 2007

– b is the retention rate or 1-dividend payout ratio

• Other Models: There are some other models on the basis of which we have

valued the company. However, there are some flaws to these models, as

detailed below

– Industry P/E: We use the industry average P/E to arrive at the value of the

company. The problem with this methodology is that markets might not

value the peers properly and hence all the stocks might be overvalued.

This will cause the industry P/E to be high as well, thus giving a high

value to the company

– Industry EV/EBITDA: We use the industry average EV/EBITDA value to

arrive at the Enterprise Value for the company. We can ascertain the

equity value of the company after removing the net debt from the EV. This

model faces the same problem as described above

– PEG Model: Using a rule of thumb, a stock with a PEG of 1 is considered

to be rightly valued. Using the 2007 P/E and five year EPS growth, we

calculate the PEG ratio for Colgate. Following the rule of thumb, we then

set the PEG = 1 and arrive at an implied P/E ratio and hence arrive at a

price level for the stock. The problem with this model is that PEG of 1 is a

rule of thumb only and not necessarily based on empirical data

COMPANY VALUATION We have arrived at the valuation for Colgate, using two different models. Using the DCF

and the intrinsic P/E model, we have arrived at a value of Rs. 255.5 per share and Rs.

267.57 per share respectively for Colgate-Palmolive. Since the current market price (Rs.

379.9) is above this, we give a SELL recommendation on the stock

Discounted Cash Flow (DCF) Model

Colgate-Palmolive 2007E 2008E 2009E 2010E 2011E 2012E 2013E 2014E 2015E 2016E

Sales 13,032.6 14,808.7 16,228.6 17,679.4 19,094 20,621 22,065 23,609 25,026 26,527 YoY Change (%) 15.93% 13.63% 9.59% 8.94% 8.00% 8.00% 7.00% 7.00% 6.00% 6.00% EBITDA 2,137.4 2,685.2 3,037.1 3,339.5 3,627.8 3,918.0 4,192.3 4,485.8 4,754.9 5,040.2 Margin (%) 16.40% 18.13% 18.71% 18.89% 19.00% 19.00% 19.00% 19.00% 19.00% 19.00% Tax (395.9) (368.9) (497.7) (613.7) (1,187.4) (1,282.4) (1,372.2) (1,468.2) (1,556.3) (1,649.7) Other Inflow 24.6 24.6 24.6 24.6 24.6 24.6 24.6 24.6 24.6 24.6 Total Cash Inflow 1,766.0 2,341.0 2,564.0 2,750.4 2,465.0 2,660.2 2,844.7 3,042.1 3,223.2 3,415.1 Capex (683.5) (183.5) (183.5) (183.5) (183.5) (183.5) (183.5) (183.5) (183.5) (183.5)

Change in Working Capital 85.7 75.0 72.0 79.3 79.3 79.3 79.3 79.3 79.3 79.3 Total Cash Outflow (597.8) (108.5) (111.5) (104.2) (104.2) (104.2) (104.2) (104.2) (104.2) (104.2) Free Cash Flow (FCF) 1,168.2 2,232.5 2,452.5 2,646.2 2,360.8 2,556.0 2,740.5 2,937.9 3,119.0 3,310.9

Source: Company Data, Team Estimates

• PV of Cash Flow = Rs. 14,491.7 million

• PV of Terminal Value = Rs. 21,098.7 million

• Total Present Value of Firm = Rs. 35,590.4 million

• Less: Net Debt (i.e. net of cash) = Rs. 836.1 million

• Equity Value = Rs. 34,754.3 million

• Shares outstanding = 136.0 million

• Intrinsic Value per share = Rs. 255.5

Sensitivity Analysis

Share Price (Rs)

Cost of Equity 9.50% 10% 10.50% 11% 11.50%

Terminal Growth

3% 247.8 228.5 212.0 197.3 184.6 4% 275.3 250.9 230.4 212.6 197.4 5% 315.0 282.2 255.5 233.1 214.2 6% 377.4 329.1 291.9 261.6 237.2 7% 489.6 407.3 348.9 304.5 270.3

Source: Team Estimates

(In Rs. Million)

Key Assumptions • Terminal growth rate of cash flow = 5%

• Beta = 0.596 (regressing against the BSE

Sensex for 3 years)

• Risk Free Rate: 7.52% (10 year

Government bond yield)

• Market Risk Premium = 5%

• Cost of Equity: 10.50%

• WACC (Discount rate) = 10.50%

(assuming negligible debt)

Intrinsic P/E Model

Po/E1 = 1/E(R)+FF*G; E(R) (Cost of Equity) 10.50% G = g/(E(R) -g) ROE (2007E) 54.6% = 1.73 b (Retention Rate) 12.2% FF = 1/E(R)-1/ROE g (ROE*b) 6.65% = 7.70 FF*G = 13.32 Po/E1 = 22.84 Target Price = 267.57


The DCF valuation model is among the most popular and fundamentally proven model

used to value companies. Since the model uses cash flows to determine the value of a

company, it is less susceptible to the vagaries of accounting policies followed the

companies. Hence based on the DCF model we value the Colgate-Palmolive stock at

Rs. 255.50.

Besides the above two models, we can use a PEG model to value the company. However

as state above, the PEG model is not empirically proven and is based only on a rule of

thumb. Also we look at industry averages to arrive at a value for the Colgate stock.

However, this model does not throw the correct value; as the market might have

overvalued the other companies as well, resulting in an incorrect valuation for Colgate

PEG Valuation Model

PEG 2007 P/E Estimated EPS CAGR (06-10)

Actual PEG 1.83 32.43 17.7%Required PEG 1 Required P/E 17.7 2007E EPS 11.71 Value of Share (Rs.) 207.33


Peer Valuation To do a comparative valuation of the company, we look at the two of its main

competitors in the oral care market viz. Hindustan Lever (HLL) and Dabur. Further, we

take two more companies from the FMCG sector viz. Nestle (India) and Marico.

At current prices, Colgate trades at 32x FY07 and 24x FY08 EPS, which is above and in

line of its industry peers. However, based on a superior expected EPS growth (27% for

FY06-08), the company’s PEG ratio is lower than the industry average.

Company Current Price

EV/Book Value

P/E EPS CAGR (06-08) PEG

EV/Sales EV/EBITDA 2007E 2008E 2007E 2008E 2007E 2008E

Colgate 379.9 27.12 32.43 24.20 27.0% 1.20 3.90 3.43 23.78 18.93HLL* 235.9 20.73 30.76 27.97 16.9% 1.82 4.28 3.86 28.54 24.65Dabur* 524.0 7.04 23.82 19.63 30.6% 0.78 2.18 1.90 14.49 12.51Nestle* 147.9 19.91 30.81 25.50 23.8% 1.29 4.04 3.51 26.77 22.63Marico* 1,093.5 19.52 30.77 24.78 17.3% 1.78 3.78 3.38 19.05 16.05Industry Average 16.80 29.04 24.47 1.42 3.57 3.16 22.21 18.96

Source: Company Data, Analyst Reports, Team Estimates * Consensus Data

Colgate is trading at 19x FY08 EBITDA value, which is equivalent to the industry

average. The Enterprise/Book Value for the company stands at 27. However, this

multiple would not be appropriate to value to FMCG sector, as most of the value is

derived from the brands owned (intangible asset) by the companies, which are not

accounted for in the balance sheets of the companies

FINANCIAL ANALYSIS

Quarterly Trends and Outlook Colgate-Palmolive has had a good year so far. Aided by price hikes and successful new

launches, the topline grew by 17.4% (y-o-y) in the first half of FY07. The operating profit

margin has increased by over 180 basis points in H1’07, vis-à-vis last year. The margins

have increased due to excise duty benefits and lower advertising and promotion spending

Topline Growth

The company has achieved double digit topline growth in the last 5 quarters. This has

been fuelled by successive 4% price hikes at the beginning of FY06 and FY07. Further,

toothpaste and toothbrush sales have shown high volume growth.

The first half of FY2007 saw a sale growth of 17.4%, with growth touching 20% in the

first quarter. Volume growth was experienced in all the oral care segments. The

toothbrush category grew by over 26%, increasing shift towards toothpaste segment.

Colgate being the market leader is expected to be the biggest beneficiary. The company is

expected to maintain its strong growth in the 2nd half of the year

Colgate: Value Growth by Category (YoY %)


2006 2007-10.0%

0.0%

10.0%

20.0%

30.0%

40.0%

50.0%

60.0%

Q1 Q2 Q3 Q4 Q1 Q2 Q3E Q4E

Toothpaste Toothpowder Toothbrush Total

Cost Analysis

• The company has experienced a decrease in material costs (as % of net sales) due

to price hikes, over the last 6 quarters. The costs are expected to be stable in the

2nd half of FY2007

• Staff costs for the company have increased, due to increased training costs at the

Baddi plant. However, going forward, the costs are expected to come down

• In the 2nd quarter, the company paid VRS to its employees in the Sewri plant in

Mumbai. All the 263 employees accepted the VRS, entailing an outgo of Rs.

588mn (Rs.273.6mn net of tax). However, the company is expected to benefit

from lower staff costs in the future

• The advertising & promotion spend (A&P) has fallen by 550 basis points in Q2

over Q2’FY06. Lack of new product launches caused a lower spending. In the

coming two quarters, the A&P spending is expected to return to the median levels

• The overheads increased sharply in H1 over last year due to increased power and

freight costs incurred due to scaling up of operations at the Baddi plant in HP.

Now with the plant operating at full capacity, the overheads are expected to

remain at high levels in the 2nd half of the FY2007

Colgate: Cost Analysis (as % of net sales)


2006 2007

48.3%

7.8%

17.7%

10.1%

46.8%

7.9%

18.5%

11.2%

40.7%

8.7%

14.4%

11.3%

44.3%

6.4%

19.7%

14.4%

43.8%

8.7%

18.3%

16.3%

43.5%

9.3%

13.0%

15.2%

43.6%

8.3%

15.6%

15.7%

43.6%

8.3%

15.6%

15.7%

0%

20%

40%

60%

80%

100%

Q1 Q2 Q3 Q4 Q1 Q2 Q3E Q4E

Raw Materials Staff A&P Overheads

Profit Analysis

The company has experienced a growth in margins, due to excise benefits and better

price realizations. In Q2, the EBIT has increased by 340 basis points over the comparable

period last year. Lower advertisement expenses (550bps), raw material cost (270bps) and

reduced outsourcing (60bps) contributed to the margin expansion. A sharp rise in

overheads (340bps) restricted further margin expansion though

Colgate: Margin & Sales Evolution

Annual Forecasts

Growing Volumes & Pricing Issues

Colgate is expected to grow due to increasing industry volume growth, better price

realizations and expected market share gains due to new launches.

Growing Volumes

• The toothpaste, toothbrush and the shaving cream industry are forecasted to

achieve good volume growth.

• In the toothpaste segment, the company is expected to grow on the back of

successful product launches. The new launches - Colgate Advanced Whitening

and Colgate Active Salt and New Colgate Max Fresh, have gained a 4% share in

the market

-

500.0

1,000.0

1,500.0

2,000.0

2,500.0

3,000.0

3,500.0

4,000.0

Q1'06 Q2'06 Q3'06 Q4'06 Q1'07 Q2'07 Q3E'07 Q4E'070.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

Net SalesEBITDA Margin

• The company is expected to gain market share on the back of successful launch of

new products, thus driving the volumes

• After a negative growth, the toothpowder segment is expected to maintain low but

positive growth. This is due to the successful re-launch of the Colgate Red

toothpowder

Better Price Realizations & Rise of Private labels

Colgate increased the prices of its toothpastes by 4% in the beginning of FY2006 and

FY2007. Due to good demand growth and better positioning, we believe that the

company would be able to sustain these annual price hikes, although at a decreasing

level. Small price hikes are also expected in the toothbrush and powder category

However, going forward, the company is expected to face increased competitive

pressures, due to emergence of private labels. Retailing in India is expected to undergo a

major change with the entry of major players such as Reliance and Bharti - Wal-Mart and

scaling up of incumbent players such as Pantaloons, Trent, and Shoppers’ Stop. The share

of organized players in the USD 210bn retail industry is expected to increase from the

current 3% to 10% by 2010E.

According to an AC Nielsen study on private labels of 80 categories across 38 countries,

most of them from Europe, in 2005, “retailers tend to create powerful brands that meet

consumers’ needs” and hence, grab a significant pie of the market.

Value Shares of private labels by category (%)

Colgate: Contribution to Sales growth - By category


Excise & Tax Benefits

The company has been able to get major tax and excise benefits as it has shifted major

part of its toothpaste production to Baddi, a tax free zone in Himachal. The company set

up the Baddi plant at a cost of Rs. 105 crore, and the plant started production in April

2005. In FY2006, the plant ran at 2/3rd of its 24,000 tonnes capacity. The benefits \of the

plant are as follows:

• Excise Benefits: No excise duty for the first 10 years of operation. The company

will be able to save 16% excise duty charged on the toothpaste (duty is charged

after a 35% abatement on the MRP)

• Tax Benefits: 100% income tax will be exempt for the first five years. 30%

income tax will be exempt in the subsequent years

We expect the plant to run at full capacity in FY2007. Further, with the closing of the

Sewri plant in Mumbai, Baddi is the only toothpaste producing plant for Colgate. We

expect the company to expand capacity of the Baddi plant by 2008. We estimate that they

will enhance capacity by 50% to 36,000 tonnes. This expectation is based on company

and analyst comments.

With increased production, the company is expected to increase the excise and tax

benefits derived from the unit in the future

73.0%

47.5%69.6%

118.1%

20.6%

11.1%

-2.0%

0.0%6.4%

41.4% 32.4%

-18.1%

-20%

0%

20%

40%

60%

80%

100%

Toothpaste Toothpowder Toothbrush Shaving Cream

Market Share GainPricingIndustry Growth

Baddi Unit: Excise & Tax Benefits

FY2005 FY2006 FY2007E FY2008E FY2009E FY2010E Total Production (tn) 44514.34 49856.06 55340.22 60874.244 66231.18 72059.52 Baddi Unit (tn) 0 16000 24000 36000 36000 36000 Share (%) 0.00% 32.09% 43.37% 59.14% 54.36% 49.96% Excise as % of sales 10.07% 7.67% 6.80% 5.57% 5.89% 6.21%

Effective Tax Rate (%) 39.14% 24.83% 17.72% 12.85% 15.62% 17.65% Source: Company Data, Team Estimates

Power and Freight Costs

The shift of production to the Baddi unit, will cause a rise in the freight and power costs

for the company. However, the fiscal benefits will more than over come the rising costs

of the production from the unit

Freight and Power costs are expected to increase


Rising Profits

EBITDA is expected to increase by 160 basis points from FY06 to FY10E. This is

because of lower excise and better price realizations, expected in the future. The PAT

will also rise by 260 basis points during the same year, due to lower tax outgo.

-

50.00

100.00

150.00

200.00

250.00

300.00

350.00

400.00

450.00

2005 2006 2007 2008 2009 2010

Power & FuelFreight

Profits are expected to rise


PROJECTED FINANCIALS

Projected Income Statement (in Rs mn)

Colgate FY 06 FY 07E FY 08E FY 09E FY 10E Toothpaste 8766.00 10130.88 11473.94 12737.85 14002.33 Toothpowder 1704.50 1829.02 1888.02 1918.30 1949.05 Toothbrush 1095.75 1344.95 1540.21 1659.53 1788.09 Shaving Cream 401.78 451.08 529.23 653.60 807.20 Others 206.98 227.67 250.44 275.48 303.03 Gross Sales 12175.00 13983.60 15681.86 17244.76 18849.71 Excise 933.18 950.97 873.19 1016.18 1170.31 Net Sales 11241.90 13032.63 14808.66 16228.58 17679.40 Raw Mat 5053.60 5682.23 6232.51 6760.70 7342.43 Staff 864.47 1133.84 1225.42 1342.91 1462.97 Advert Spend 1978.00 2033.09 2421.22 2653.37 2890.58 Others 1402.84 2046.12 2244.28 2434.47 2643.95 EBITDA 1942.99 2137.35 2685.24 3037.11 3339.46 Depreciation 314.27 314.27 347.60 347.60 347.60 Other Income 256.10 171.90 171.90 171.90 171.90 EBIT 1884.82 1994.98 2509.54 2861.41 3163.76 Interest 6.00 6.00 6.00 6.00 6.00 PBT 1878.82 1988.98 2503.54 2855.41 3157.76 Tax 502.81 395.94 368.89 497.72 613.71 PAT 1376.01 1593.04 2134.64 2357.69 2544.05 Extraordinary Items 51.70 0.00 0.00 0.00 0.00 Adjusted PAT 1324.31 1593.04 2134.64 2357.69 2544.05 Dividends 1162.99 1398.98 1874.61 2070.49 2234.15 EPS 9.74 11.71 15.70 17.34 18.71

Source: Team Estimates, Company Data

10.00%

11.00%

12.00%

13.00%

14.00%

15.00%

16.00%

17.00%

18.00%

19.00%

20.00%

FY2006 FY2007E FY2008E FY2009E FY2010E

EBITDAPAT

Projected Balance Sheet (in Rs mn)

FY 06 FY 07E FY 08E FY 09E FY 10E Share Capital 1359.90 1359.90 1359.90 1359.90 1359.90 Reserves 1350.80 1557.48 1830.14 2129.96 2452.48 Net Worth 2710.70 2917.38 3190.04 3489.86 3812.38 Loans 43.60 43.60 43.60 43.60 43.60 Total Liabilities 2754.30 2960.98 3233.64 3533.46 3855.98 Net Fixed Assets 1691.20 2060.43 1896.33 1732.22 1568.12 Investments 1483.40 1483.40 1483.40 1483.40 1483.40 Cash & Bank Balances 879.70 802.82 1314.57 1850.47 2416.38 Other Current Assets 2134.90 2400.46 2632.93 2856.07 3101.82 Total Current Assets 3014.60 3203.28 3947.50 4706.54 5518.20 Current Liabilities 2823.60 3174.83 3482.29 3777.41 4102.44 Provisions 687.40 687.40 687.40 687.40 687.40 Total Current Liabilities 3511.00 3862.23 4169.69 4464.81 4789.84 Net Current Assets -496.40 -658.95 -222.20 241.73 728.36 Deferred Liability (Net) 76.10 76.10 76.10 76.10 76.10 Total Assets 2754.30 2960.98 3233.63 3533.45 3855.98


Projected Cash Flow Statement (in Rs mn)

Cash Flow FY 06 FY 07E FY 08E FY 09E FY 10E Pre Tax Profit 1,878.8 1,989.0 2,503.5 2,855.4 3,157.8 Depreciation 314.3 314.3 347.6 347.6 347.6 Interest Expense 5.9 6.0 6.0 6.0 6.0 Change in WC 468.3 85.7 75.0 72.0 79.3 Others (136.3) (147.3) (147.3) (147.3) (147.3)Total Tax Paid (684.8) (395.9) (368.9) (497.7) (613.7)Cash Flow from Operations 1,846.2 1,851.7 2,416.0 2,636.0 2,829.7 Capital Expenditure (428.9) (683.5) (183.5) (183.5) (183.5)Change in Investments (105.9) - - - - Interest Received 159.9 159.9 159.9 159.9 159.9 Cash Flow From Investing (374.9) (523.6) (23.6) (23.6) (23.6)Equity Raised - - - - - Debt Raised 3.8 - - - - Interest Paid (5.9) (6.0) (6.0) (6.0) (6.0)Dividend (1,151.1) (1,399.0) (1,874.6) (2,070.5) (2,234.1)Cash Flow From Financing (1,153.2) (1,405.0) (1,880.6) (2,076.5) (2,240.1)Net Change in Cash 318.05 (76.88) 511.75 535.91 565.91 FCF 1,417.27 1,168.20 2,232.46 2,452.50 2,646.15


Projected Key Ratios

Ratios FY 06 FY 07E FY 08E FY 09E FY 10E ROE (%) 48.85 54.61 66.92 67.56 66.73ROCE (%) 50.12 53.96 66.17 66.86 66.10EBIT margin 16.77 15.31 16.95 17.63 17.90EBITDA margin 17.28 16.40 18.13 18.71 18.89Net margin 11.78 12.22 14.41 14.53 14.39Asset Turnover 4.08 4.40 4.58 4.59 4.58D/E 0.02 0.01 0.01 0.01 0.01


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