Limited upside in medium term

In the fast moving consumer goods (FMCG) business, low category penetration spells better growth for players. Colgate Palmolive seems to be enjoying the benefits of being the market leader in categories such as toothpaste and tooth brushes in India, which are not heavily penetrated.

However, if the competition in the category is intense, even the market leader can get singed. The company's volume growth slowed down 100 basis points year-on-year to 10 per cent in the fourth quarter of 2010-11. This is the slowest one in last 12 quarters, according to Elara Securities. Hindustan Unilever and Dabur are giving tough competition to Colgate Palmolive in toothpaste category, particularly in rural market with low-priced SKUs.

Core toothpaste category penetration stood at 64.3 per cent in CY10, as against 59 per cent in CY09. Analysts say even as the category has expanded significantly over the last few years, there is plenty of room for double-digit volume growth in the medium term.
 

MARGIN PRESSURES
In Rs cr	Q4FY11	FY11
Net Sales	581.77	2220.56
% chg	12.60	13.20
PBIDT	152.13	557.49
% chg	3.60	6.40
PBIDT (%)	26.15	25.11
Chg in bps	-229.00	-158.00
Net Profit	114.06	402.58
% chg	-0.30	-4.90
Standalone numbers, % change is year-on-year, Source : Capitaline, Compiled by BS Research Bureau,

Toothpastes continue to witness double-digit volume growth (12 per cent), driven by healthy growth in its flagship brands Colgate Dental Cream, MaxFresh and Active Salt. Increasing penetration of toothpastes (64.3 per cent) and higher per capita consumption (127 gms/year) have aided growth. New launches slated for the current financial year will help the company improve its market-share. However, the company's share in the toothbrush segment fell 60 basis points to 40.3 per cent since November 2010.

The volume growth is offset by rising costs, say analysts. Higher packaging cost due to rise in crude oil prices and flavours such as mint and menthol pushed raw material costs even higher in the fourth quarter, thereby impacting operating margin. Consequently, FY11 earnings before interest, taxes, depreciation and amortisation (Ebitda) margin declined 138 basis points to 20.3 per cent. New launches in the premium categories could help the company salvage margins to some extent.

According to research firm Nomura, however, gross margins are not comparable on a year-on-year basis due to several one offs which impacted the March quarter performance, but on a quarter-on-quarter basis gross margins were down 230 basis points. What has come to the rescue are lower advertising and promotion (A&P) costs during the quarter, which stood at 13.4 per cent of sales. This has seen a sharp decline from the third quarter, when A&P to sales had touched 20.9 per cent. However, with high competition, Nomura expects A&P spends to remain strong in 2011-12.

Net sales for the March quarter rose 12.6 per cent to Rs 600 crore, lower than analysts' expectation. Material costs as a percentage of sales were 39.8 per cent during the quarter. This sets the tone for future growth outlook. Despite a healthy top line growth outlook of 14 per cent in 2011-12 and 2012-13, strain on Ebitda margins will limit valuation upgrades. At the current market price of Rs 920.10, the stock is trading at a P/E multiple of 27.6 times 2011-12 and 24.3 times 2012-13 estimated EPS. Some analysts find the valuations fair at current levels, leaving little room for an upside in the medium term.