COLGATE PALMOLIVE (INDIA) LTD: ADDING SMILES !!!

Scrip Code: 500830 / COLPAL

CMP:  Rs. 932.95; Market Cap: Rs. 25,374.90 Cr; 52 Week High/Low: Rs. 1,050.00 / Rs. 787.20

Total Shares: 27,19,85,634 shares; Promoters : 13,87,12,672 shares – 51.00 %; Total Public holding : 13,32,72,962 shares – 49.00 %; Book Value: Rs. 28.32; Face Value: Rs. 1.00; EPS: Rs. 21.20; Dividend: 2,400.00 % ; P/E: 43.98 times; Ind. P/E: 54.35; EV/EBITDA: 26.80 times.

Total Debt: ZERO; Enterprise Value: Rs. 25,182.00 Cr.

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 has its good Bonus history as it gave 1:1 bonus in 1982, 1:1 in 1985, 1:1 in 1987, 1:1 in 1989, 3:5 in 1991, 1:1 in 1993 and lastly gave bonus in ratio of 1:1 on July 30, 2015. In November 2007, the Company in its First-of-its-Kind investor friendly move & announced a Reduction of Share Capital under section 100 of Companies act of 1956. It gave back Rs. 122.40 Cr to its shareholders by reducing the face value of its equity shares from Rs. 10 to Re. 1.00 and accordingly its equity share capital came down from Rs. 135.99 Cr to Rs. 13.59 Cr. And Rs. 9 per share was paid as a ‘Deemed Dividend’ and was tax free in the hands of shareholders. The share of the Colgate Palmolive after this got relisted on BSE on December 17, 2007 at Rs. 380 per share. 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. In November 2007, it acquired a 75 % equity interest in Advanced Oral Care Products, Professional Oral Care Products and SS Oral Hygiene Products, the company is the fastest growing and one of the oldest companies catering to the personal care products. 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 Procter & Gamble of USA, Unilever PLC of UK, 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:

Colgate Palmolive (India) Limited is India’s leading provider of scientifically proven oral care products with multiple benefits at various price points. Colgate has a market share of 43.6 % in the oral care in India. India’s oral care market is estimated 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 in this sector. The penetration of toothpaste in India is 80 %, with 25 crore of the population still using conventional methods of brushing. Though urban penetration is higher at 92.3 %, rural penetration lags behind at 74.1 %. The rural population accounts for 35 % toothpaste revenues for Colgate. It has been constantly increasing reach in rural areas by various initiatives like ‘Rural vans’, 1031 Colgate Rural vans in 2015 vs. 951 in 2014 and 340 in 2012. Hence, there is a huge untapped opportunity for Colgate to increase its reach and volumes being the market leader of the segment. Further, the overall per capita consumption of toothpaste in India is significantly lower at 179 gm compared to other developing nations, China at 237 gm, Philippines at 352 gm and Brazil at 692 gm, providing enough room for Colgate to maintain its volume growth. The increase in volume growth & per capita consumption would come through increasing awareness on oral hygiene, change in consumer habits like brushing twice daily and increasing penetration, aiding the company to maintain volume and value growth. COLGATE is the largest player in oral care in India with a market share of 55.7 % in toothpaste & 46.2 % in toothbrush category. Despite Procter & Gamble’s (P&G) re-entry into the toothpaste segment in India in June, 2013 with Oral B as a brand, Colgate’s market share only strengthened. Colgate has increased its volume market share in toothpaste from 55 % in June 2012 to 55.7 % in March 2016. Similarly, the market share in toothbrush has also increased from 39 % to 46.2 % for the same period. With FMCG player Patanjali’s entry has disrupted the toothpaste category, denting Colgate’s market share by 1.50 % from 57.2 % in 2015. Colgate has an edge over its indigenous rival in the form a strong brand equity forged upon 80 years of presence in the Indian market along with a vast distribution network covering over 5 million outlets. Colgate’s renewed focus on the naturals segment under toothpaste, alongside its presence on the traditional segments like family, whitening, freshness, gum care, sensitive, would aid the company in fending off disruptive competition, given Colgate’s historical expertise in launching innovative product offerings in the market. Over the years, Colgate has built an extensive oral care portfolio through constant innovation, thereby offering products across the value pyramid and within each sub-categorylike sensitive toothpaste, gum care tooth paste, electric brush, kids brush etc. Lately, it has been aggressive on extension of its premium portfolio to capture up-trading consumers. In FY16, it launched ‘Pain Out’, a product for express toothache relief, Palmolive hand wash as well as toothpastes, the Total Charcoal Deep Clean, Active Salt Neem and 360 range of toothbrushes like Charcoal Gold, Whole Mouth Clean, Visible White, Floss-Tip. Hence, with constant innovation and higher A&P spends, Colgate would continue to remain the dominant player & Colgate being the largest beneficiary of increasing penetration levels in India which is currently at 80 %. With Colgate’s strengthening presence in toothpastes in spite of fierce competition in the segment, the long term growth of Colgate remains positive on back of the long term growth driven by increasing per-capita consumption and premiumisation in the segment. The company’s unmatched product portfolio would continue to maintain its dominance in the oral care segment. Though there are few near term concerns for margins given the increased competitive intensity in the segment and expired excise benefits, Colgate’s high focus on innovation and strengthening market share would continue to yield positive long term returns for the company. Colgate has the best distribution reach in the oral care category with over 50 lakh outlets in India. In fact, it is the second best distributed FMCG brand in the country after HUL’s Lifebuoy. Colgate is also much stronger than its peers in rural India. Colgate’s expansion in recent years has only widened the gap between itself and its peers in rural India. Globally, Colgate has had experience in leading distribution increase and deriving advantages from it, leading to strong sales growth and market share gains. For many years now, Colgate has been at the forefront of driving category growth, which enables it to take first-mover advantage in a category with high growth potential. 

Until FY15, the company’s Bright Smiles Bright futures Program had reached a total of 12.5 Cr school children in nearly 300,000 schools across the country, including 1 Cr kids in nearly 30,000 schools in FY15 itself. In addition, the company’s Oral Health Month Program, in association with dentists, reached 5.5m people in villages last year. No other company in any Indian FMCG category has category development efforts on schools and villages anywhere even close to this scale. With over 30 Cr people in India not using modern oral care products, these programs are an excellent way of conversion. For a lot of the potential incremental customers, Colgate, because of such efforts, is the first and only oral care brand that they are aware of. India is one of the few global technology centres for Colgate. Unlike foods where products have to be customized to a large extent for local tastes, MNCs in personal care generally roll out the same products worldwide. Colgate has been an exception on that front and its Indian R&D center has enabled strong roll out of innovative products for India particularly in the herbal/ natural space even before the recent boom. This enables them to participate actively in the ongoing herbal segment boom in India. Colgate Active Salt and Colgate Active Salt Neem have over 7 % market share in toothpaste category, and over one-third share in herbal space, an area perceived to be a relatively weak for Colgate. Within this, Active Salt Neem launched just last year already has over 1 % market share. In addition, the company also has access to innovations as a result of the parent R&D spend of over USD 250m every year. Oral care is half of the parent sales. Its competitors in oral care in India have no such advantages. Colgate has by far the best in Advertising & Promotion in the category with an A&P spend of over  Rs. 700 Cr or 17 % as a percentage to sales, among the highest for any player in any single category in Indian FMCG. Oral care forms 97 % of Colgate’s total sales unlike peers for whom the category is much lower in salience. For Dabur, the segment is only 10 % of sales, while for HUL oral care is only 6 % of sales. Consistently higher advertising ahead of peers creates higher awareness, strengthens brand power and facilitates immense support for new launches. Apart from the benefits of concentrated large advertising on oral care, unlike peers, Colgate also has access to the war chest of Operating Cash Flow between Rs. 500 Cr to 600 Cr every year to invest in the oral care business, unlike peers. Colgate will be spending Rs. 1,250 Cr between FY14-FY17 on first setting up state-of-the-art toothpaste and toothbrush facilities at Sanand and Sri City in FY14 and FY15, and subsequently expanding capacities substantially in both these centers in FY16 and FY17, also an indication of the parent’s confidence about the Indian entity’s prospects. These capital investments enable faster roll out of better quality and premium products, attain logistical benefits due to being closer to suppliers as well as customers unlike just the Baddi and Goa plants earlier. These investments will also help enhance scale advantages even further compared to oral care peers who cannot match such massive investments in a single category. With state-ofthe- art manufacturing, there is also potential to be a regional sourcing hub. With the widest distribution in the category, as discussed earlier, Colgate is also likely to be the only oral care brand available in many areas as well. Single category focus in oral care, a key area of strength both in India and globally, gives Colgate benefits of concentration of ad spend and cash flows which other players cannot match. This increases barriers to entry over other players. 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.

Outlook and Valuation:

Colgate has been present in India for more than 76 years & has products across all oral care categories and price points; it is one of the most popular and preferred oral hygiene brands in the country. Its wide range of toothpastes and toothbrushes are very well known and has strong brand recall. The Company also provides a range of personal care products under the ‘Palmolive’ brand name. Colgate has been ranked as India’s #1 Most Trusted Brand across all categories for four consecutive years from 2003 to 2007 and in 2011 and 2012 by Brand Equity’s Most Trusted Brand Survey. It is the only brand to be in the top three from 2001-2014. Colgate India’s oral care sales are 97 % of total India sales, which is 8.3 % of the parent’s sales in the oral care segment globally and its total sales are 4 % of the parent’s total sales. This makes the India oral care business highly influential in the global scheme of things for the parent, which will strive to do everything in its power to grow this business over the long term. The company’s performance in each country is measured across a few key metrics, such as volume growth, gross margin and market share. Achieving a YoY improvement is crucial in every country and the company sets targets in conjunction with regional teams. For developing and high growth economies, the company sets goals which are higher than that for other countries. For Colgate achieving volume growth is a key priority, and the management believes that there is immense room for volume growth as penetration and consumption led room is still very high in India. The company’s volume growth will also be boosted by the occasional users of its oral care products turning into regular users. India’s infrastructure development will help the company reach more rural markets as will its own expansion. Colgate has expanded rapidly over the past few years. The company will always continue to work on rural expansion. Colgate aims to drive habit changes through kids who are seen as the change agents in hygiene. Colgate India has reported market share decline for three quarters in a row from September 2015 onwards. The company has effectively lost market share of 2.20 % YoY over this period, of which the last reported period January-April 2016 itself reported a 1.60 % decline sequentially. The loss in market share has largely been due to the ongoing herbal wave led by Patanjali, a recent entrant into the category and by the wider availability of Patanjali’s products, including its oral care products, in modern retail stores like Big Bazaar, D-Mart, Reliance Fresh and Star Bazaar among others, a process that started in October 2015. What is noteworthy is that after being initially taken by surprise at Patanjali’s fast paced growth, Colgate’s management has responded quickly by launching new products at a faster pace, both in herbal and non-herbal segment, and increasing its A&P to sales in the last quarter, and now Colgate has regained a market share of 0.70 % in toothpaste in April 2016, followed by an additional gain of 0.10 % in May 2016, thereby arresting the decline in its market share in 4QFY16. The management sounded far more confident than they appeared to be at the company’s recent earnings call. While it may still be too early to call out a recovery or stability in Colgate’s market share for the near term, the company’s strong response to the new challenger is highly encouraging, and it has been able to not just limit the damage, but also gain market share in the last two months by 0.70 % and 0.10 % respectively. Patanjali reaches only 2,00,000 outlets in terms of its reach in the traditional retail front, which is 90 % of the market in India for oral care as well as other FMCG categories. Patanjali also has capacity and logistical challenges in meeting demand from small retailers. Colgate has access to 50 lakh outlets, which for Patanjali, is many years away. By that time Colgate would not only be better prepared but also be able to strengthen its moats further. Colgate has also been able to participate in and benefit from the increased salience of the herbal segment in toothpaste. Colgate developed Colgate Herbal, Colgate Active Salt and Colgate Active Salt Neem through its local R&D efforts. These products have a combined share of 7 % of the overall toothpaste market, thus allowing Colgate to participate in the previous herbal wave as well as in the current one. The implementation of GST will help create an efficient distribution system, but could also add to near-term costs. GST will aid in consolidation of warehouses. Colgate will invest the benefits from GST into improving its business infrastructure, and after the fall in the stock price of over 16 % from its peak of Rs. 1,099 in April 2015, Colgate, on a P/E basis, is trading at a discount to MNC FMCG peers like HUL, PGHH and Nestle and in line with most domestic peers, despite stronger earnings growth potential in the long term and best of breed return ratios compared to peers. The stock is trading at close to 10-year low on a P/B basis and a discount to its 5- year average PE of 36x. With earnings prospects likely to witness a strong uptick from FY18, and given Colgate’s stronger moats compared to peers, best of breed return ratios as well as strong free cash flow generation going forward. Colgate Palmolive enjoys strong Brand recall along with strong innovations in pipeline and has focused approach which ensures robust growth for the company. Company commands premium valuations due to strong brand, sustained high ROE and ROCE of more than 100 % and dividend pay-out ratio of 75 %. Higher dividend payout exuberates confidence on future cash generation. Dividend yield is also likely to increase to close to 2.6% by FY19. Since listing in 1978, Colgate India has recorded a CAGR of 26 % in returns to Shareholders. At the current market price of Rs. 932.95, the stock is trading at a PE of 38.55 x FY17E and 33.20 x FY18E respectively. The company can post Earning per share (EPS) of Rs. 24.20 for FY17E and Rs. 28.10 for FY18E. With the category growth potential and Colgate’s strong position in the category, we expect healthy shareholder returns going forward as well. 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. 

KEY FINANCIALS	FY15	FY16E	FY17E	FY18E
SALES (₹ Crs)	3,983.50	4,162.30	4,578.50	5,150.00
NET PROFIT (₹ Cr)	559.00	607.80	659.40	764.90
EPS (₹)	20.60	22.30	24.20	28.10
PE (x)	44.90	41.30	38.00	32.80
P/BV (x)	32.60	24.60	22.20	20.00
EV/EBITDA (x)	30.10	26.60	23.40	20.10
ROE (%)	81.60	67.90	61.40	64.20
ROCE (%)	80.50	67.10	60.40	63.10

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