Colgate Palmolive’s (Colgate) Q4FY16 numbers came in line with estimates—sales jumped 6.8% YoY, EBITDA fell 2.5% and PAT dipped 10.8% YoY. Recovery in volume growth at 4% YoY (highest in 4 quarters) coupled with pick up in herbal innovations indicate gradual recovery in FY17 (to be aided by soft volume growth in base). Heightened competitive intensity, especially from herbal players—Dabur clocked 6 quarters of double digit oral care growth in Q4FY16, Patanjali’s Dant Kanti crossed INR4.5bn mark in FY16—remains key overhang. We are enthused by the recent success of Palmolive handwash. Maintain ‘HOLD’.
Sales look up; brand investments to aid momentum
Key positives: (i) 4% YoY domestic volume growth (highest in 4 quarters); (ii) rise in brand investment to aid volume recovery; (iii) success in personal care (3% of India sales; 21% of global sales) can boost long-term growth; and (iv) step-up in herbal segment innovation (launched first sensitive toothpaste with clove). Key negatives: (i) 450bps jump in annual tax rate (ex INR311 prior period reversal); FY17 effective tax rate to be 32%; (ii) toothpaste market share loss to 55.7% in YTD16 (up 60bps MoM in April 2016) from 57.2% in 2015; and (iii) inventory days up to 72 days from 59 in FY15.
Q4FY16 conference call: Key highlights
Urban areas clocking marginally higher growth than rural areas. Colgate Active Salt Neem has 1.1% market share (pan-India). Barring multi-usage and low priced packs, other segments—freshness, whitening, naturals, family—posting good growth. ~300mn consumers still do not use toothpaste, this along with promoting twice a day usage (<20% brush twice daily in urban areas) present strong growth potential. Premium mix improved ~400bps to 19.4% over FY12-16. Personal care focus will be on niche products where leadership (or second position) in modern trade is likely.
Outlook and valuations: To improve gradually; maintain ‘HOLD’
We estimate 7.8% EPS CAGR over FY16-18. ~20% correction in stock price in past 1 year factors in risk from herbal players. Recovery in volume growth and return of pricing growth in FY17 (FY16 pricing growth negatively impacted by phasing out of fiscal sops) are re-rating triggers. At CMP, the stock trades at 29.1x FY18E EPS. We maintain ‘HOLD/Sector Performer’ with target price of INR917.
