Hold on Colgate Palmolive

Written by Prashant | Edelweiss | Updated: May 31 2013, 06:05am hrs
We continue to like Colgates focus on innovation, distribution expansion and building brand equity but expect margins to be under pressure due to heightened competitive intensity leading to lower pricing power and need for higher ad and promotional spends. We value Colgate (30x) at a slight discount to HUL (32x) on FY15E earnings to arrive at a target price of R1,431. We maintain hold/sector performer. At current market price, Colgate is trading at 35.7x and 30.9x FY14E and FY15E, respectively.

Colgates Q4FY13 revenue came in line (up 18% y-o-y), though PAT was 5% below estimate due to higher-than-expected jump in costs. Key positives include: (i) robust 12% y-o-y overall volume growth (8% in Q3FY13) despite high base and heightened competitive intensity; (ii) strong volume growth (11% y-o-y) and market share gain in toothpaste (up 130bps y-o-y); and (iii) market share gain in toothbrush (up 380bps y-o-y). The only key negative was Ebitda margin contraction likely due to heightened competitive intensity. Margin could come under pressure due to P&Gs likely entry.

Colgates gross margin expanded 35bps YoY. Ebitda margin declined a massive 388bps y-o-y due to higher ad spends (up 158bps y-o-y on a low base at 8.3% of sales), staff costs (up 100bps y-o-y) and other costs (up 165bps y-o-y). The company maintained leadership in toothpaste with 55.4% volume share (Jan-Apr 2013), up 130bps y-o-y, with 11% y-o-y volume growth.