COLGATE PALMOLIVE (INDIA) LTD : DIWALI 2013 MUHURAT PICK !!!

Scrip Code: 500830 / COLPAL

CMP:  Rs. 1248.15; Buy at current levels.
Short term Target – Rs. 1350; STOP LOSS – Rs. 1148.29; Market Cap: Rs. 16,973.94 Cr; 52 Week High/Low: Rs. 1579.90 / Rs. 1190.00

Total Shares: 13,59,92,817 shares; Promoters : 6,93,56,336 shares –51.00 %; Total Public holding : 6,66,36,481 shares – 49.00 %; Book Value: Rs. 36.00; Face Value: Rs. 1.00; EPS: Rs. 38.90; Div: 2800.00 % ; P/E: 32.08 times; Ind. P/E: 39.12; EV/EBITDA: 24.38.

Total Debt: ZERO; Enterprise Value: Rs. 16,679.14 Cr.
EX - DIVIDEND on 6th NOV 2013 -  Rs. 9.00 (900%)

COLGATE PALMOLIVE (INDIA) LTD: The Company was founded on 23 September, 1937 and is based in Mumbai, India. The company is the subsidiary of Colgate Palmolive Company of USA. The company offered 11,79,000 equity shares of Rs. 10 each at a premium of Rs. 15.00 to the general public in November, 1978. Colgate-Palmolive (India) Limited provides oral care products. The company offers products that include toothpastes, toothpowder and toothbrushes under the 'Colgate' brand, as well as a specialized range of dental therapies under the banner of Colgate Oral Pharmaceuticals. The company also provides a range of personal care products under the brand name 'Palmolive'. The oral care product mix includes: Toothpastes which comprises of Colgate Dental Cream, Colgate Total 12, Colgate Kids Tooth Paste, Colgate Fresh Energy Gel, Colgate Herbal, Colgate Herbal White, and Colgate Cibaca Top. Its Tooth Brushes products comprises of Colgate Kids, Colgate Navigator Plus, and Colgate Sensitive, Colgate Extra-Clean, Colgate Super 55, Colgate Cibaca Top, Colgate Motion, Colgate Massager, Colgate Super Junior Flexible, and Colgate Super Child Flexible. Other products offered by the company include tooth powder and whitening products. Its Personal care product mix includes: Shower gel which comprises of Palmolive Aroma Shower Gel – Sensual, Palmolive Aroma Shower Gel – Relax, and Palmolive Aroma Shower Gel – Revive. It’s Bar soaps products comprise of Palmolive Aroma Soap – Revive and Palmolive Aroma Soap – Relax. Company’s Liquid hand wash products comprise of Palmolive Aroma Liquid Hand Wash – Revive and Palmolive Aroma Liquid Hand Wash – Relax. Colgate’s Talcum Powder products comprises of Palmolive Aroma Talcum Powder - Revive and Palmolive Aroma Talcum Powder – Relax. Other products in the personal care includes Palmolive shave cream and Palmolive Charmis cream. House hold care products include Axion Dish Washing paste. Colgate’s from the Dentist to the company offers Dentist product mix that includes Gingivitis treatment comprising of PerioGard and Total Plax, Sensitivity treatment products comprising of Gel Kam and Sensitive, Tooth whitening products, Fluoride therapy consists of Phos-Flur anti-cavity fluoride rinse and lastly Mouth ulcer treatment which consists of Oragard-B. Colgate Palmolive (India) Ltd is locally compared with Amar Remedies Ltd, Farmax India Ltd, Gillette India Ltd, Godrej Consumer Products Ltd, Hindustan Unilever, JHS Svendgaard Laboratories Ltd, Jyothy Laboratories, Nirma Ltd, Procter & Gamble Ltd  and Globally with Beiersdorf AG of Germany, Reckitt Benckiser PLC of UK, Kimberly-Clark Corporation of USA, Church & Dwight Co., Inc of USA, Clorox Company of USA, Paos Holdings Berhad of Malaysia, Niitaka Co ltd of Japan.

Investment Rationale:

India’s oral care market is around $100 Cr and is expected to grow at a CAGR of about 14 % during 2011–2015, which is much higher than the global growth rate. This has led to an increase in the number of oral care companies entering the space, thereby stiffening the competition. P&G has made a similar move by launching its first toothpaste in the country under the Oral-B brand, which commands close to 30 % share in the toothbrush market. Although P&G’s Oral-B has a strong brand recall in India, Colgate-Palmolive has also positioned itself well to defend its market share here. In India only 42 % of the people living in Indian villages and small towns use toothpaste, the proportion is expected to increase with rising rural income and greater awareness about oral hygiene through advertisements, dental camps and free dental checkups. Colgate has done well in this regard by building strong distribution strength across rural India. Colgate now has the highest reach among all consumer products companies in the country. More than 30 % of India’s population suffers from gum sensitivity and oral hygiene problems. Thus, India’s urban population is continuously upgrading from regular toothpastes to dental creams due to which this category is growing at 30 %–40 % annually. Colgate has launched its innovative products such as Colgate Total Pro Gum Health and Colgate Sensitive which will help Colgate to compete with P&G’s Oral-B Pro-Health. Colgate launched several products and a new production facility in India. To support its products in the wake of rising competition, the company also increased its advertising spending which increased by 31 % during the first half of 2013. This has resulted in market share gains in toothpastes, which has grown from 52 % in 2012 to 56 % presently. Company’s annual Report 2013 emphasizes the importance of innovations, market development and distribution expansion to drive growth in oral care business. Colgate is driving market development through consumer awareness program like ‘Brush at Night’, ‘Oral Health Month’ and ‘Bright Smiles, Bright Future’. Innovations are creating new segments like Gum Care, Sensitivity & Visible White. Colgate has launched Colgate Total Pro Gum Health and Colgate Visible White toothpaste in FY13. It has also launched Colgate MaxFresh and Colgate 360 (battery operated) in toothbrush category. Strong efforts on distribution are underway; wherein store coverage increased 40% and rural coverage increased by 25% in FY13. Given that P&G’s toothpaste launch was in the pipeline for some time, competitors have been gearing up for this, and this gets evidenced by a spate of promotions and price-offs, it is expected that Colgate’s ad-spends will too increase. Colgates has a very strong leadership in toothpaste category, it has strengthened its leadership position in toothpaste category from 52.9 % in FY12 to 54.6% in FY13, while market share in toothbrush strengthened to 40.5 %. Hindustan Unilever and Dabur India are at risk of market share loss wherein, the toothpastes contributes 6 % - 7 % of Hindustan Unilever’s and 9 % - 10 % of Dabur India’s revenues. Colgate management is committed for continued investments in India and their efforts are underway for toothpaste facility in Sanand, Gujarat and toothbrush facility in Sricity, Andhra Pradesh. The company has already expended capex of Rs. 1oo Cr and capital advance of Rs. 54.80 Cr and expects commercial production in FY14.

Outlook and Valuation:

Colgate has been present in India for more than 76 years. With products across all oral care categories and price points, it is one of the most popular and preferred oral hygiene brands in the country. Compared to P&G, Colgate offers a much larger assortment of oral care products in a wide price range. This allows consumers to trade up and down gradually depending on macroeconomic conditions without impacting Colgate’s sales volume. Colgate-Palmolive was faced with a similar situation in Brazil where it commands over 70 % market share. When P&G entered the country’s oral care market in 2009, a majority of its market share gains came from smaller competitors and overall category growth for Colgate continued due to maintained strong brand equity among consumers. P&G’s market share gains in India will also come from smaller competitors such as HUL and Dabur given that Brazil and India are quite similar in terms of economic growth and where Colgate-Palmolive has a dominating presence. Recently, Colgate transferred the GSSO division to Colgate Global Business Services Pvt Ltd (CGBSPL) which will enable Colgate Palmolive India to focus on its core business. Colgate divested GSSO by way of slump sale to CGBSPL for a consideration of Rs. 59.89 Cr. With this transfer, expenses and income resulting from this entity would no more reflect in Colgate’s financials w.e.f April 2013. On performance side the volume growth in toothpaste category has moderated from 13 % in recent past to 10 % in FY13. Though, no qualitative input is available in the annual report, but with market checks seems to indicate slower growth in value tiers. Media spends has risen from Rs. 260 Cr in FY12 to Rs. 350 Cr in FY13, A&P spend increased from 15.7 % in FY12 to 15.9% in FY13. This probably hints at preparedness of Colgate for upcoming entry of P&G in India. The management exuberated confidence that the Oral Care category would continue to grow at a healthy pace given the size of the opportunity, but also cited that competition may intensify in near future. With the underlying volume growth of 10 % - 11 % is in sync with management commentary. However, launch of P&G in India, should drive promotions in this category. Colgate Palmolive India has increased media spends in FY13; higher promotion spends in FY14E should be underway. There is overhang on earnings in the short-run. The company has a Cash flow generation of Rs. 460 Cr in FY13 as against Rs. 300 Cr in FY12; also the company has a strong dividend payout at 77 % vs average of 72 % in last 3 years. Higher dividend payout exuberates confidence on future cash generation. At the current market price of Rs. 1239.95, the stock is trading at a PE of 29.86 x FY13E and 25.78 x FY14E respectively. The company can post Earning per share (EPS) of Rs. 41.80 for FY13E and Rs. 48.40 for FY14E. It is expected that with the company’s surplus scenario is likely to continue for the next three years & will keep its growth story intact for the coming quarters also. One can ‘BUY’ in COLGATE PALMOLIVE INDIA LTD with a target price of Rs. 1350.00 for shorter term and for Rs. 1430.00 for Medium to Long term investment.

KEY FINANCIALS	FY12	FY13	FY14E	FY15E
SALES (Rs. Crs)	2,623.80	3,084.10	3,514.70	4,083.60
NET PROFIT (Rs. Crs)	446.50	496.80	567.90	658.10
EPS (Rs.)	32.80	36.50	41.80	48.40
PE (x)	43.20	38.80	34.00	29.30
P/BV (x)	44.30	39.40	34.90	30.80
EV/EBITDA (x)	36.90	32.40	25.20	21.00
ROE (%)	109.00	107.40	109.00	111.7
ROCE (%)	149.20	148.90	154.50	160.20

I would buy COLGATE PALMOLIVE (INDIA) LTD with a price target of Rs. 1,430 for the 6 month target. As I always say, I am a long term believer in markets & I do respect the markets and will keep a strict stop loss of 8 % or Rs. 1148.29 on your every purchase.

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