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Tuesday, September 23, 2014

CCL PRODUCTS (INDIA) LTD : DAS CAFÉ !!!

*As the author of this blog I disclose that I do hold C.C.L. Products India Ltd in my portfolio.

Scrip Code: 519600 / CCL

CMP: Rs. 123.45; Buy at current levels and Accumulate at every Dips; Short term Target: Rs. 150; Medium to Long term Target: Rs. 200; STOP LOSS – Rs. 113.55 (for short term players only); Market Cap: Rs. 1,552.03 Cr; 52 Week High/Low: Rs. 124.90 / Rs. 24.95. Total Shares: 13,30,27,920 shares; Promoters : 5,92,49,243 shares – 44.54 %; Total Public holding : 7,37,78,677 shares – 55.46 %; Book Value: Rs. 26.65; Face Value: Rs. 2.00; EPS: Rs. 5.54; Dividend: 50.00 % ; P/E: 22.28 times; Ind. P/E: 21.43; EV/EBITDA: 12.12.

Total Debt: Rs. 240.39 Cr; Enterprise Value: Rs. 1,848.57 Cr.

CCL PRODUCTS INDIA LIMITED: CCL Products India Limited was incorporated 0n December, 1961 and is based in Hyderabad, India. The company was earlier known as Sahayak Finance & Investment Corporation Limited and changed its name to Continental Coffee Limited in the year 1993 reflecting the change of its business from hire purchase financing to coffee related business. The company is predominantly engaged in exporting and manufacturing of Soluble Coffee known as Instant Coffee. The company came out with an IPO of about 27,00,000 lakh shares of Rs. 10 each at a premium of Rs. 10 per share in August, 1995. The company, CCL Products (India) Limited, together with its subsidiaries, manufactures and sells coffee products in India. Its coffee products include pure soluble coffee products comprising spray dried coffee powder and granules, freeze dried coffee, and freeze concentrate liquid coffee; decaffeinated coffee; flavoured coffees in vanilla, cinnamon, caramel, chocolate, and hazelnut flavours; certified coffees; and chicory-coffee mix. The company provides its products in various packs, such as jars, cans, sachets-pouches, bag-in boxes, drums, and bulk boxes under the brand name of Continental Spéciale, Continental Premium, and Continental Supreme. CCL Products (India) limited also exports its products to approximately 67 countries worldwide. Company also has its own manufacturing process units for Green beans storage, cleaning and grading, roasting and grinding unit, Extraction-Clarification unit, Aroma recovery and Evaporation unit, Spray drying, Agglomeration, Freeze-drying unit, Freeze Concentrated Liquid Coffee manufacturing unit, and Packaging unit. CCL Products also has an Export Oriented Unit, with the ability to import green coffee into India from any part of the world, and export the same to any part of the world, free of all duties. CCL Products' state-of-the-art Coffee Manufacturing Plant is located at Duggirala Mandal, Guntur District, Andhra Pradesh, India. The company is also certified with ISO 9001:2008, HACCP and BRC Quality Management System (QMS), and has achieved “Trading House” status. CCL Products is also certified approved to produce Organic Coffee, Rain Forest Alliance Coffee and Fair Trade Coffee, in any combination, by the relevant organizations. The company’s Coffee Manufacturing Plant also holds Kosher and HALAL Certification. CCL Products India Ltd can be locally compared with Tata Global Beverages, Bombay Burmah Trading Co, Mcleod Russel (India) Ltd, Jay Shree Tea & Industries Ltd, Nestle India, Assam Company India Ltd, Goodricke Group Ltd, Warren Tea Ltd, B&A Ltd, Upper Ganges Sugar & Industries Ltd, Tata Coffee Ltd, Hindustan Unilever Ltd and Globally with Unilever PLC of UK, Suntory Beverages & Foods Limited of Japan, BrasilAgro of Brazil, B& G Foods Inc of USA, Premium brands holding corporation of Canada, Ten Peaks Coffee Com of USA, Farmer Bros. Co. of USA, Keurig Green Mountain Inc of USA, Growers Direct Coffee Company Inc of USA, Power Root Berhad of Malaysia, Unicafe Inc of Japan, Coffee Holding Co. Inc of USA. Key Coffee Inc of Japan.

Investment Rationale:

CCL Products (India) is among the world’s leading and India’s largest processor and exporter of instant coffee with exports to more than 67 countries. It has 10 % market share globally in instant coffee exports. Its top big customers include Israel’s Strauss Coffee B.V. and Germany’s Deutsche Extrakt Kaffee. CCL is one of the very few companies globally that have successfully scaled up this business and increased its capacity near about 10 times since inception in 1995, and that too without equity dilution. CCL Products (India) Ltd. Plans to produce 5,000 tons of coffee this year at its Vietnamese plant which has an annual capacity of 10,000 tons, and company plans to raise this capacity further in the next three years. This capacity expansion in Vietnam will make CCL the world’s second-biggest grower of the beans. Forecasts for good record crops in Vietnam and India will guarantee CCL Products raw materials and bolster efforts to win more buyers for instant coffee supplies which are currently dominated by Nestle SA and Kraft Foods Group Inc. CCL was the largest importer of coffee from Vietnam for 15 years and so Vietnam govt. offered concessions for setting up plant there. The Vietnam plant offers four benefits: 1) Logistical advantage of US$150 per tn because of proximity to coffee-growing zone, 2) Better raw material availability, with lead time lower by one-and-a half months as Vietnam is the second-largest green coffee grower, 3) Favourable duty structure and close proximity to coffee-consuming ASEAN nations like Japan, Korea, China, etc, and 4) No income-tax for first four years and tax exemption of 50 % for next five years. Vietnamese operations are expected to account for almost 50 % of the profit by 2016-17. India’s coffee market is estimated at Rs. 3,000 Cr with Nestle India and Hindustan Unilever Ltd. dominating with a combined branded market share of more than 65 %. The organised coffee market in India is around Rs. 600 Cr or 20 % of the total domestic coffee consumption of Rs. 3,000 Cr and the coffee chain business is growing by 40 % in India. The per capita consumption of coffee in India is just 82 grams compare that with 4 kilos in US. Consumption in India is seen expanding to 2.5 million bags of 60 kilograms each by 2020 from 1.92 million bags in 2013. The world coffee market is set for the largest shortage in nine years as drought cuts the crop in Brazil. Demand will exceed production by 8.8 million bags in the 12 months starting October. Domestic consumption has increased, and this gives CCL the advantage of entering the Indian market as a brand. Indian coffee is the most extraordinary of beverages, offering intriguing subtlety and stimulating intensity. India is the only country that grows all of its coffee under its shade. India’s coffee growing regions have diverse climatic conditions, which are very well suited for cultivation of different varieties of coffee such as Arabicas and Robustas. India is one of the major coffee producing countries and ranks seventh in the world. With only about 2 % share in the global coffee area, India contributes about 4 % towards the world production and it contributes between 4.5 - 5 % of global coffee export. The Govt. of India however, proposes to provide support for the certification of organic coffee under the scheme ‘Integrated Coffee Development Project’ for XII Plan. There has been a gradual increase in the production of coffee in the country. The production of coffee in the country increased from 3,02,000 MT in 2010-11 to 3,18,200 MT in 2012-13. The domestic coffee consumption which was at 1,02,000 MT in 2009-10 has risen to 1,15,000 MT in 2011-12 and growing at the rate of 5-6 % per annum and is estimated at be at 1,20,000 MT during 2012-13. The exports of coffee have achieved an all-time high of 3.33 Lakh MT during 2011-12. CCL Products is no longer content with selling to institutional buyers outside India. The company wants a slice of the domestic branded instant coffee market and has started retailing under the Continental brand in Andhra Pradesh. The company is also supplying to private label manufacturers such as retail supermarkets.

Outlook and Valuation:

CCL Products India ltd is India’s largest private label in instant coffee, supplying to premium brands in over 67 countries. CCL Products also have one of the world’s largest single-location plants and is considered amongst the top three private label manufactures in global instant coffee. Recently, Government of India approved Rs. 950 Cr project for development of the Coffee sector in 12th Five year Plan, with an aim to increase production and Exports of Coffee. The Integrated Coffee Development Project (ICDP) will be funded for reasearch & development and for export promotion and for transfer of technology. Coffee processing is a niche and highly profitable industry, and has high entry barriers. Coffee processing is not an easy business, as it is very important to get the right blend. Further, the taste & preference varies region-wise and culture-wise. Experience and relationships is Key to success, and the model is not easily replicable. It takes three to five years to win over a client and establish one’s credentials. CCL Products is one of the very few companies globally that have successfully scaled up this business. CCL’s USP is its technology, which it acquired from Brazil, allowing it to use low grade of green (or raw) coffee beans to produce very high quality instant coffee. As stated above, coffee business is very tough to scale up, and the profitability, return ratios and cash flow of CCL remained subdued until FY11, adversely impacting its valuation. Therefore, its historical valuation is not the right benchmark. CCL has increased its capacity since inception in 1995 from 3,500tn and more than three times in the past six years at 33,000tn currently. The expansion was funded mainly through internal accruals, and without recourse to significant debt. CCL has not raised any fresh equity since its listing in 1995. In addition to this, CCL’s debt profile is conservative with a peak Debt to Equity ratio of 1.6 x to its current Debt to Equity ratio of 0.8 x. With Vietnam operations, it is expected that CCL can generate a healthy free cash flow of Rs. 340.5 Cr over FY14-FY17E, which is likely to be utilised to repay the entire debt of Rs. 292.1 Cr and can also improve dividend payout. CCL has now diversified operations in three countries - India, Switzerland and Vietnam - and plans to set up a plant in Africa. This diversified presence will help CCL to gain access to new markets and also exploit arbitrage opportunities between different manufacturing plants to its advantage which would also improve valuation due to lower volatility in earning profile. To cite an example, CCL will leverage the lower duty structure available for its Vietnam plant in several Asian markets and also leverage extended tax benefit. CCL operates on fixed margins without carrying the risk of coffee price volatility. CCL plans to launch its own products on Pan India basis under the brand name Continental (Spéciale, Premium and Supreme) and has already made a soft launch in AP. CCL started doing private labelling for Reliance, Spencer and other super markets, which helped CCL to get space for the Continental brand in these super markets, thereby increasing its visibility. It will take two more years for CCL to roll out its own brand nationally. Nestle India and HUL dominate the branded coffee market in India with a combined organised market share of more than 65 %. Unlike Nestle, which sells only spray dried coffee, CCL has a wider portfolio comprising premium freeze dried coffee, pure vanilla coffee products, etc. In addition, competitors (Nestle and HUL) do not have manufacturing capacities (for freeze dried instant coffee) and CCL has been manufacturing value-added coffee like single filter, double filter, freeze dried, etc at a much lower cost. Hence, CCL is able to offer better products at prices lower than its competitors. CCL’s management aims to achieve in the next three to five years market share of 20 %. As CCL has completed a major portion of its capex, it is likely to incur only maintenance capex. With strong profitability, lower capex and improving working capital cycle, free cash flow generation is expected to be very healthy and company could be debt free by FY17 which would result in re-rating of the stock. At the current market price of Rs. 123.45, the stock P/E ratio is at 13.27 x FY15E and 10.92 x FY16E respectively. Company can post Earning per share (EPS) of Rs. 9.30 for FY15E and Rs. 11.30. One can buy this stock with a target price of Rs. 200.00 for Medium to Long term investment.

KEY FINANCIALS	FY14	FY15E	FY16E	FY17E
SALES (₹ Crs)	716.80	949.60	1,068.20	1,143.20
NET PROFIT (₹ Cr)	64.40	92.00	123.70	149.80
EPS (₹)	4.80	6.90	9.30	11.30
PE (x)	18.60	13.00	9.70	8.00
P/BV (x)	3.40	2.80	2.30	1.80
EV/EBITDA (x)	10.20	7.80	6.30	5.20
ROE (%)	20.40	23.60	25.80	25.10
ROCE (%)	12.30	16.40	20.20	23.30

I would buy CCL INDIA LTD for Medium to Long term for target of Rs. 200.00 and for the shorter term the target would be Rs. 150.00. 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 ₹ 113.55 on every purchase. (Why Strict stop loss of 8 % ?) - Click Here
*As the author of this blog I disclose that I do hold CCL INDIA LTD in my portfolio.

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Sunday, November 23, 2014

COLGATE PALMOLIVE (INDIA) LTD : SMILING ALL THE WAY !!!

Scrip Code: 500830 / COLPAL

CMP: Rs. 1,893.20; Accumulate at Every Dips.
Short term Target - Rs. 2,060; Medium to Long term Target – Rs. 2,366; STOP LOSS – Rs. 1741.74; Market Cap: Rs. 25,746.16 Cr; 52 Week High/Low: Rs. 2049.00 / Rs. 1235.20.

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. 44.11; Face Value: Rs. 1.00; EPS: Rs. 37.47; Dividend: 2700.00 % ; P/E: 50.52 times; Ind. P/E: 47.16; EV/EBITDA: 33.28.

Total Debt: ZERO; Enterprise Value: Rs. 25,596.88 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 and finally 1:1 in 1993. 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. This has led to an increase in the number of oral care companies entering the space, thereby stiffening the competition. The combined share of all the local brands, including Vicco, Ajanta, Anchor, Smyle and Baidyanath has now slipped to 2 % in calendar year of 2013 from more than 5 % from two years ago. Regional players had over 15 % share in the toothpaste market some 10 years ago. So the big marketers such as Colgate, Hindustan Unilever and the Indian player Dabur have widened their reach to almost all rural and urban markets and have slashed its entry-level prices to Rs. 5.00 and Rs. 10 which is giving a hit to local brands. Also, multinationals like Procter & Gamble (P&G) and GlaxoSmithKline (GSK) have now entered the oral-care market, increasing the competition, which is affecting small & regional players. GSK's Sensodyne has already gathered more than 2.3 % share in the Indian oral-care market. Sensodyne has crossed Rs. 100 crore in annual revenues and it leads the sensitive toothpaste category with a 27 % market share, while P&G's mass brand Oral B has garnered a market share of 0.30 % in the first six months of its launch. Companies such as Dabur having a market share of 11 % and Hindustan Unilever have doubled their rural reach over the past couple of years and have grown their market share. Market leader Colgate, too, increased its share in the toothpaste segment to 54 % last year, from 51 % in 2011. In India only 42 % of the people living in villages and small towns use tooth-paste; this proportion is expected to increase with the rising rural income and greater awareness about oral hygiene through advertisements, dental camps and free dental checkups. Colgate has done very well in this regard by building its strong distribution strength across rural India. Colgate now has the highest reach among all the consumer products companies in the country. Also, 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 tooth-pastes to dental creams due to which this category is growing at 30 % to 40 % annually. To carter the urban modern population, Colgate has from time to time is introducing innovative products like Colgate SlimSoft Charcoal launched recently in August 2014, which is India’s first and only toothbrush with super slim tip bristles infused with Charcoal priced at Rs. 60. Similarly it also introduced Colgate SlimSoft last year; it also launched Sugar Acid Neutraliser, Visible white Regimen. 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-category such as sensitive toothpaste, gum care toothpaste, electric brush, kids brush, etc. It has been aggressive on extension of its premium portfolio to capture the up-trading consumers. In FY14, it launched two varieties of toothpastes like Active healthy White, Max Fresh Tea and Slim Soft Toothbrushes. Hence, with constant innovations and higher A&P spends, it is believed that Colgate would continue to remain the dominant player and be the largest beneficiary of increasing penetration levels in the country which is currently at 75 %. Colgate Palmolive also falls under FMCG category and this sector is the fourth largest in the Indian economy and has a market size of $13.1 billion. The FMCG market is all set to treble at US$ 33.4 billion by 2015. The penetration level as well as per capita consumption in most product categories like jams, toothpaste, skin care, hair wash etc in India is low indicating the untapped market potential. The Indian FMCG industry represents nearly 2.5 % of the country’s GDP. The industry has tripled in size in past 10 years and has grown at 17 % CAGR in the last 5 years driven by rising income levels, increasing urbanization, strong rural demand and favourable demographic trends. Food products and personal care together make up two-third of the sector’s revenues. Rural India accounts for more than 70 % of the Indian population and accounts for 50 % of the total FMCG market. With the changing lifestyle and increasing consumer demand, the Indian FMCG market is expected to cross $8,000 Cr by 2026 in towns with population of up to 10 lakh. Distribution is the most important variable in the marketing plans of most consumer goods manufacturers, because managing such a massive sales and distribution network is in itself a huge task. This sector will continue to see growth as it depends on an ever-increasing internal market for consumption, and demand for these goods remains more or less constant, irrespective of recession or inflation. Hence the growth in this sector will continue to remain robust. 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 Valuations:

Colgate has been present in India for more than 76 years & has products across all orla care categories and prices points. It is one of the most popular & preferred oral hygiene brands in the coountry. It has 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 No. 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 2001-2012. Colgate Palmolive is the largest player in the oral care segment in India with the market share as of June, 2014 of about 57 % in toothpaste and 42.6 % in toothbrush category. In spite of Procter & Gamble’s (P&G) re-entry into the toothpaste segment in India in June, 2013 with its brand Oral B, Colgate’s market share has only strengthened. Colgate has increased its market share in toothpaste from 54.7 % in June, 2012 to 57.1 % in April, 2014. Similarly, the market share in toothbrush has also increased from 38.7 % to 42.6 % for the same period. Colgate is believed to be the second largest player in the toothpaste category, HUL, is losing its market share with Dabur India inching share from 10 % to 11 % in last two years. Further, regional players like Vicco, Ajanta, Anchor, Smyle and Baidyanath have also witnessed a loss in market share in toothpastes. On performance side, Colgate Palmolive reported a 10.9 % increase in sales to Rs. 990 Cr. It reported PAT growth of 18.3 % on 2.40 % margin expansion led by 7 % volume growth in toothpaste to Rs. 130 Cr. Its EBITDA margins expanded 2.40 % as 0.90 % higher staff costs. EBITDA increased by 27.5 % to Rs. 186 Cr. Colgate’s Toothpaste volumes were up by 7 % with overall volumes up 5 %. Rural demand has been better than urban demand which declined at higher pace. Colgate’s Toothpaste market share was up 0.70 % at 56.7 % v/s 56 % in Jan‐Sep 2013. Colgate’s Toothbrush market share was up by 1.40 % YoY to 42.6 %. Colgate Palmolive’s new launches like Sugar Acid Neutraliser, Visible white Regimen and Colgate Slim soft toothbrush’s success is ensuring strong visibility. 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 % & also there's a possibility of bonus issues by the company as it has been more the two decades from the last bonus given by the company so investors can expect bonus soon as company has enough reserves. Higher dividend payout exuberates confidence on future cash generation. At the current market price of Rs. 1,873.20, the stock is trading at a PE of 43.76 x FY15E and 36.80 x FY16E respectively. The company can post Earning per share (EPS) of Rs. 42.80 for FY15E and Rs. 50.90 for FY16E. 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 Short term target of Rs. 2,060 and my conservative price for Medium to Long term investment is Rs. 2,366.00 but looking at the potential of the company to earn it could give Rs. 3000 + in near next 3 years time .

KEY FINANCIALS	FY13	FY14	FY15E	FY16E
SALES (₹ Crs)	3,163.90	3,578.20	4,089.50	4,772.90
NET PROFIT (₹ Cr)	496.80	484.30	582.10	692.80
EPS (₹)	36.50	35.60	42.80	50.90
PE (x)	47.00	48.20	40.10	33.70
P/BV (x)	47.70	38.90	35.60	32.30
EV/EBITDA (x)	34.80	34.80	27.50	22.00
ROE (%)	101.46	90.00	74.70	68.85
ROCE (%)	153.28	127.54	118.44	109.85

I would buy COLGATE PALMOLIVE (INDIA) LTD for Medium to Long term for target of Rs. 2,366.00 and for the shorter term the target would be Rs. 2,060.00. 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 ₹ 1,741.74 on every purchase. (Why Strict stop loss of 8 % ?) - Click Here

*Dear Reader friend, if you enjoyed this article, please do share it with your Friends and Colleagues through Facebook and Twitter, and drop in your valuable thoughts in comment box..

READ HERE TO KNOW MORE ON LONG TERM INVESTING - CLICK HERE

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Wednesday, July 13, 2016

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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*As the author of this blog I disclose that I do not hold COLGATE PALMOLIVE LTD in my any of the portfolios.

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