2QFY2012 Result Update | FMCG

October 31, 2011

Colgate
Performance Highlights
(` cr) Revenue EBITDA OPM (%) PAT 2QFY12 657 112 17.1 100 2QFY11 552 112 20.3 100 % yoy 19.1 0.3 (321bp) (1) Angel est. 625 125 20.0 107 % Diff. 5.2 (10.0) (288bp) (7.3)

NEUTRAL
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 13,636 1.0 1,069/783 18,630 0.4167 17,705 5,327 COLG.BO CLGT@IN

`1,003 -

Source: Company, Angel Research

Colgate reported a mixed performance for 2QFY2012. The companys top line grew by 19.1% yoy, 5.2% above our estimates, driven by volumes. Earnings for the quarter declined slightly by 0.6% yoy, owing to a sharp contraction in OPM. The companys operating margin contracted by 321bp yoy on account of higher ad spends and other expenses. We recommend a Neutral rating on the stock. Steady growth in oral care: Colgate registered top-line growth of 19.1% yoy during 2QFY2012, which was completely driven by volumes (registered 13% of overall volumes). The oral care category witnessed steady volume growth of 20% yoy, though volume market share in the toothpastes category declined to 52.6%. All core brands, Colgate Dental Cream, Active Salt, Max Fresh and Cibaca contributed to the companys top-line growth. In the toothbrush category, Colgates market share declined to 36.3%. Colgate Plax registered strong growth and its volume market share increased to 26.4%. Outlook and valuation: During FY2011-13E, we expect Colgate to report a 14.9% CAGR in its top line (largely volume growth). Thus, we 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 a higher tax rate (26% in FY2012). At the CMP, the stock is trading at 26.6x FY2013E EPS. We see limited upside in the stock price from current levels; hence, we recommend a Neutral rating on the stock. 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 7.3 19.4 22.3

Abs. (%) Sensex Colgate

3m (2.7) 3.2

1yr (11.6) 14.6

3yr 80.9 165.5

FY2010 1,962 15.8 423.3 43.4 21.7 31.1 32.2 41.8 156.1 150.3 6.8 31.2

FY2011 2,221 13.2 402.6 (4.9) 20.3 29.6 33.9 35.5 113.4 122.5 6.0 29.4

FY2012E 2,550 14.8 438.6 8.9 19.8 32.3 31.1 34.0 111.7 125.0 5.1 26.0

FY2013E 2,931 14.9 513.6 17.1 20.3 37.8 26.6 24.8 108.0 120.8 4.4 21.7

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 | 2QFY2012 Result Update

Exhibit 1: Quarterly performance

Y/E March (` cr) Net Sales Consumption of RM (% of Sales) Staff Costs (% of Sales) Advertising (% of Sales) Other Expenses (% of Sales) Total Expenditure Operating Profit OPM Interest Depreciation Other Income PBT (excl. Extr. Items) Extr. Income/(Expense) PBT (incl. Extr. Items) (% of Sales) Provision for Taxation (% of PBT) Reported PAT PATM Equity shares (cr) EPS (`) Adjusted PAT
Source: Company, Angel Research

2QFY12 657 264 40.1 61 9.2 114 17.4 106 16.2 545 112 17.1 1 11 28 129 129 19.6 29 22.7 127 19 14 7.3 100

2QFY11 % yoy 552 220 39.9 53 9.7 79 14.3 87 15.8 440 112 20.3 1 8 26 129 129 23.3 28 22.1 126 23 14 7.4 100 (0.6) (0.6) 1.2 2.8 0.1 23.0 25.8 8.4 0.1 23.9 0.3 21.8 44.8 13.5 19.1 19.8

1HFY2012 1,268 510 40.2 110 8.7 213 16.8 205 16.1 1,039 230 18.1 1 19 58 267 267 21.1 67 25.1 258 20 14 14.7 200

1HFY2011 1,081 417 38.6 98 9.0 148 13.7 167 15.4 829 251 23.2 1 16 52 286 286 26.4 63 22.2 274 25 14 16.3 222

% chg 17.4 22.5 13.0 43.7 22.8 25.2 (8.5) 43.2 18.5 11.8 (6.5) (6.5) 5.4 (5.9)

(10.0) (10.0)

Top-line growth slightly above estimates, volume growth at 13%

Colgate posted healthy top-line growth of 19.1% yoy to `657cr (`552cr), marginally above our estimates, led by steady 13% volume growth in its core toothpaste category. All core brands, Colgate Dental Cream, Active Salt, Max Fresh and Cibaca contributed to the companys top-line growth. Also, the newly launched brand, Colgate Sensitive Pro-Relief contributed to the companys growth. In the toothbrush category, Colgates market share declined to 36.3%. Volume market share of Colgate Plax increased strongly to 26.4%. However, market share of the toothpaste category declined to 52.6%. During the quarter, the company launched Colgate 3600 Surround toothbrush.

October 31, 2011

Colgate | 2QFY2012 Result Update

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

700 600 500
(`cr)

Exhibit 3: Market shares decline in 2QFY2012

55.0 50.0 45.0
(yoy %)

19.1 18.1 17.0 13.4 487 491 517 657 13.2 13.8 12.6

15.6

19.1

25.0 20.0 15.0

400 300 200 100 2Q10 3Q10

(%)

657 552 558 582 611

10.0 5.0 -

40.0 35.0 30.0 25.0 Toothpaste Toothbrush

4Q10

1Q11

2Q11

3Q11

4Q11

1Q12

2Q12

Top-line (LHS)

yoygrowth (RHS)

2Q11

3Q11

4Q11

1Q12

2Q12

Source: Company, Angel research

Source: Company, Angel research

Earnings decline by 0.6%, led by lower OPM

Colgates earnings for the quarter registered a decline of 0.6% yoy to `100cr (`122cr), beating our estimates by 7.3%, despite an 8.4% increase in other income and lower depreciation cost. High ad expenses on account of new product launches dragged the companys earnings.

Exhibit 4: Earnings show a slight decline...

130 110 90 41.3 49.7 39.6 11.8 (0.3) (0.6) (43.1) (17.7) (0.6) 60.0 40.0 20.0 -

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

80.0 70.0 60.0 50.0 40.0 30.0 20.0 10.0 70.1 57.4 57.2 59.9 60.1 61.3 58.9 59.6 59.9

(` cr)

(yoy %)

70 50 30 10

(20.0) (40.0) (60.0)

24.1 21.5 19.2 19.5 20.6 17.1 17.1 20.3 13.4 16.9 15.3 16.1 17.4
2Q10 3Q10 4Q10 1Q11

(%)

21.6 14.3 13.8 16.2 17.4

2Q11 3Q11 4Q11 1Q12 2Q12

2Q10

3Q10

4Q10

1Q11

2Q11

3Q11

4Q11

1Q12

2Q12

PAT (LHS)

yoy growth (RHS)

OPM

Gross margin

A&P spends

Source: Company, Angel Research

Source: Company, Angel Research

October 31, 2011

Colgate | 2QFY2012 Result Update

OPM contracts by 321bp yoy led by high ad spends

On the operating front, Colgate delivered a margin contraction of 321bp yoy to 17.1% (20.3%), largely on account of a sharp increase in ad spends due to launch of premium products. The companys gross margin contracted by 22bp yoy on account of higher raw-material costs. Colgate has been under high raw-material price pressure for the past many quarters, though cooling down in raw-material prices is foreseen.

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 3600 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 for FY2011-13E at 26%, as income tax benefits at Baddi facility reduce from 100% to 30%. Expensive valuations for a muted earnings CAGR: At the CMP of `1,003, the stock is trading at P/E of 26.6x FY2013E EPS, which we believe is very expensive. In terms of earnings growth, we do not expect any positive surprises.

October 31, 2011

Colgate | 2QFY2012 Result Update

Outlook and valuation

During FY2011-13E, we expect Colgate to report a 14.9% CAGR in its top line (largely volume growth). We 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). At the CMP, the stock is trading at 27x FY2013E EPS. We see limited upside in the stock price from current levels; hence, we recommend a Neutral rating on the stock.

Exhibit 6: Peer valuation

Company Asian Paints Britannia Colgate Dabur GSKCHL GCPL HUL ITC Marico Nestle Reco. Neutral Accumulate Neutral Accumulate Neutral Neutral Neutral Neutral Neutral Neutral Mcap (` cr) 30,226 5,608 13,636 17,581 9,955 14,187 81,868 164,938 9,483 40,982 CMP (`) 3,151 469 1,003 101 2,367 438 375 213 154 4,250 TP (`) 495 115 Upside (%) 5 14 P/E (x) FY12E 30.7 30.5 31.1 25.1 28.6 26.5 32.1 28.6 30.5 42.1 FY13E 25.0 20.9 26.6 21.9 24.1 20.4 28.2 24.1 24.5 35.4 EV/Sales (x) FY12E 3.2 1.1 5.1 3.5 3.3 3.5 3.6 6.4 2.8 5.6 FY13E 2.7 0.9 4.4 3.0 2.8 2.8 3.1 5.3 2.4 4.8 RoE (%) FY12E 39.6 37.8 111.7 44.9 32.6 36.6 87.5 32.7 30.4 91.1 FY13E 38.3 46.0 108.0 41.6 31.8 29.4 85.3 31.5 28.6 72.9 CAGR # Sales 17.3 17.3 14.9 20.5 17.3 22.9 12.7 17.6 15.7 16.1 PAT 19.8 36.0 12.9 18.8 17.5 20.2 17.1 17.4 27.6 18.9

Source: Company, Angel Research, # Denotes CAGR for FY201113E

Exhibit 7: Angel vs. Consensus estimates

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

FY2012E 2,550 2,611 (2.3)

FY2013E 2,931 2,987 (1.9)

EPS (`) Angel estimates Consensus Diff (%)

FY2012E 32.3 32.3 (0.1)

FY2012E 37.8 37.1 1.8

Exhibit 8: Return of Colgate vs. Sensex

130% 120% 110% 100% 90% 80% 70% 60%

Exhibit 9: One-year forward P/E band

1,400 1,200 1,000 800 600 400 200 Dec-05 Dec-07 Dec-09 Apr-05 Apr-07 Apr-09 Aug-06 Aug-08 Aug-10
30x

Dec-10

Apr-11

Mar-11

Aug-11

Jul-11

Feb-11

Nov-10

May-11

Sep-11

Oct-11

Jan-11

Jun-11

Share Price (`)

Sensex

Colgate

15x

20x

25x

Source: Company, Angel Research

Source: Company, Angel Research

October 31, 2011

Apr-11

Colgate | 2QFY2012 Result Update

Exhibit 10: One-year forward P/E

35.0 30.0 25.0 20.0 15.0 10.0 5.0 Oct-06 Oct-07 Oct-08 Oct-09 Oct-10 Feb-07 Feb-08 Feb-09 Feb-10 Feb-11 Oct-11 Jun-07 Jun-08 Jun-09 Jun-10 Jun-11

Exhibit 11: One-year forward Premium vs. Sensex

160% 140% 120% 100% 80% 60% 40% 20% 0% -20% -40%
Dec-06 Dec-07 Dec-08 Dec-09 Aug-06 Aug-07 Aug-08 Aug-09 Aug-10 Dec-10 Apr-06 Apr-07 Apr-08 Apr-09 Apr-10 Aug-11 Apr-11

Source: Company, Angel Research

Source: Company, Angel Research

October 31, 2011

Colgate | 2QFY2012 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

October 31, 2011

Colgate | 2QFY2012 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 (17) 367 14 388 401 (17) 384 14 536 550 (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) 153 (20) (255) 33 112 144 345 23 35 (34) 55 (46) 268 9 34 43 238 (34) (204) 107 144 251 485 38 (23) (24) 62 70 484 (111) 17 (93) (0) 318 (24) (294) 96 251 348 FY2011 FY2012E FY2013E 520 34 4 (27) 117 31 446 (51) (18) (69) (5) 351 (27) (329) 48 348 396 593 35 119 (38) 154 (82) 473 (27) 0 (27) 349 (34) (316) 131 396 526 694 42 59 (48) 180 11 579 (101) 0 (101) 365 (43) (323) 155 526 681

October 31, 2011

Colgate | 2QFY2012 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) WC cycle (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 58.6 54.2 84.1 1.3 9.1 64.3 96.9 46.2 43.5 63.0 1.5 7.9 54.9 65.8 32.2 29.6 41.8 2.0 6.8 34.2 42.4 33.9 31.2 35.5 2.2 6.0 31.8 36.0 31.1 28.8 34.0 2.2 5.1 27.9 34.1 26.6 24.5 24.8 2.3 4.4 23.4 24.3 FY2008 FY2009 FY2010 FY2011E FY2012E FY2013E

October 31, 2011

Colgate | 2QFY2012 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):

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

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

Neutral (-5 to 5%)

October 31, 2011

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