COLGATE-PALMOLIVE (India) LTD Date: 30-Aug-13

S to ck

Ide a

CMP: Rs.1203 TARGET: Rs.1532 Upside: 27% SENSEX

18,620

NIFTY

5,472

Eq. Cap. (Rs. Crs)

13.60

Face Value (Rs.)

1.0

M. Cap (Rs. Crs)

16,361

BSE Code

500830

NSE Code

COLGATE

Financial Year

Apr-Mar

BUY

Incorporated in 1937, Colgate-Palmolive (India) Ltd is India’s leading provider of personal care products including oral care at various price points. The company leads the Rs.5050 Crs Indian toothpaste market by holding 54.2% of the value market share. Colgate has one of the widest distribution networks in India –available in almost 4.85 mn retail outlets across the country.

Rising awareness drives Indian Oral care market On back of increasing awareness about oral hygiene, improving income, and high advertising expenditure by players, the Indian oral care market has shown stupendous growth. Tooth paste and tooth powders hold the majority share of the market, and this is expected to remain the major sub-segment in future. Colgate’ Oral care (toothpaste) market share unlikely to be hurt Colgate is the leader in the Indian oral care market with a share of over 50%. It is the top consumer products brand in the country with the highest consumer reach. However, P&G’ recent entry into the Indian toothpaste market with its Oral-B Pro-Health toothpaste has sparked concerns about the company’s prospects in the country. We believe, P&G’s market share gains in India will come from smaller competitors like HUL, GlaxoSmithKline Consumer and Dabur. Colgate has faced with a similar situation in Brazil in year 2009 where it commands over 70% market share and then P&G entered the market. Then also P&G’ market share gains came from smaller competitors and overall category growth rather than from Colgate.

52-w H/L

1580/1127

Avg. Daily Vol.

18524

TTM EPS (Rs.)

37.52

The “Colgate Advantage” over P&G’ Oral-B

P/E (x)

32.1x

BVPS (Rs.)

49.62

P/BVPS (x)

24.2x

M.Cap/Sales

5.2x

Dividend Yield

2.28%

While P&G is selling the Oral-B toothpaste in urban India, Colgate is striving to increase its penetration in rural areas. Although only 42% of the people living in India’s 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. In the last couple of years, Colgate has launched innovative products such as Colgate Total Pro Gum Health and Colgate Sensitive which will help it compete with Oral-B Pro-Health. A Oral care leader in Toothbrushes too with 41.5% market share

Stock vs. Sensex

Over the years, Colgate has led development in the Oral Care category through technology and innovation. Leading with a market share of 41.5% in the toothbrush category, Colgate constantly aims to grow the toothbrush penetration in the country. To take on P&G’s Oral-B on every front, Colgate has launched SlimSoft, a new product in the ~Rs.1,000 Crs toothbrush market. This follows Colgate’s recent attempt to block the retail space for Oral-B toothpaste in modern trade. Successful and effective marketing strategies: stepped up advertisement spend by 34% y-o-y in FY13 Colgate’s intense advertising and promotion cost is the highest in the Indian consumer sector ~18-19% of sales which is much higher than the sector average (10-12%). Colgate has leveraged its partnerships with neighborhood stores and supermarkets to offer trial packs as well as helping create awareness among consumers regarding the benefits of oral health care through messages on prescription bags and better in-store displays. At the CMP of Rs.1203, the stock is trading at 28.2x FY14E and 23.6x FY15E EPS of Rs.42.72 and Rs.51.05 respectively. We recommend BUY rating on the stock with a 12-18 months Target price of Rs.1532, providing an upside of 27.3%. Please Refer DISCLAIMER on the Last Page

Research Desk

Company Profile

Leads the Rs.5050 Crs Indian toothpaste market by holding 54.2% of the value market share

Incorporated in 1937, Colgate-Palmolive (India) Ltd is India’s leading provider of personal care products including oral care at various price points. The personal care products manufactured by the company include toothpastes, toothpowder, toothbrushes and mouthwashes 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 ‘Palmolive’ brand name including bodywash, liquid hand-wash, hair care and skin care products, shaving cream and dish washing paste. The company leads the Rs.5050 Crs Indian toothpaste market by holding 54.2% of the value market share. Colgate- today has one of the widest distribution networks in India – a logistical marvel that makes Colgate available in almost 4.85 million retail outlets across the country. Colgate-Palmolive Company is the company's ultimate holding company. The parent has been in the consumer goods business for more than 200 years since it was established in 1806. The company operates in more than 200 countries worldwide with revenues exceeding $17 billion distributed among its four major operating segments – oral care, personal care, home care and pet care. 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 2001-2012. Colgate is one of the most widely distributed brands, with a presence in 4.85 million retail outlets out of a total of 5.72 million in India. Colgate competes with other players like Hindustan Unilever (HUL), Procter & Gamble (P&G), Dabur India, Estee Lauder and L’Oreal in the personal care segment.

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Research Desk

INVESTMENT POSITIVES Rising awareness drives Indian Oral care market In India, oral care segment holds a substantial share in the overall cosmetic market. On back of increasing awareness about oral hygiene, improving income, and high advertising expenditure by players, the Indian oral care market has shown stupendous growth. Tooth paste and tooth powders hold the majority share of the market, and this is expected to remain the major sub-segment in future. Colgate and Hindustan Unilever (HUL) (Pepsodent brand) together account for over two-thirds of the organized toothpaste market. In toothpowder market, Colgate, HUL and Dabur are the major players. It is estimated that the Indian oral care market will register a strong CAGR of ~14% during 2011-2015. There exists an immense potential for tooth brush market in rural areas. Dental health camps and free dental checkups have raised awareness about dental infections and diseases, especially in sub-urban and rural parts. Government has taken various initiatives like dental health camps to promote good oral care. Manufacturers have used advertising campaigns to promote higher consumption of toothpastes and toothbrushes. Indian oral care market offers huge potential as penetration and per capita consumption of oral care products is very low. However, rising per capita income and increasing awareness is driving demand of oral care products. Consumers have started switching to value-added toothpastes like gels, mouth washes, and teeth whitening products. In rural areas, consumers are switching from toothpowders to toothpastes.

Colgate - India’ top consumer brand

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Research Desk

Catering to different price segments

Colgate’ Oral care (toothpaste) market share unlikely to be hurt Colgate is the leader in the Indian oral care market with a share of over 50%. It is the top consumer products brand in the country with the highest consumer reach. However, Procter & Gamble’s (P&G) recent entry into the Indian toothpaste market with its Oral-B Pro-Health toothpaste has sparked concerns about the company’s prospects in the country. India’s $1 billion oral care market is forecast 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 Oral-B has a strong brand recall in India, we believe Colgate has positioned itself well to defend its market share. We believe, P&G’s market share gains in India will come from smaller competitors like HUL, GlaxoSmithKline Consumer and Dabur. Colgate has faced with a similar situation in Brazil in year 2009 where it commands over 70% market share and then P&G entered the market. Then also P&G’ market share gains came from smaller competitors and overall category growth rather than from Colgate.

The “Colgate Advantage” over P&G’ Oral-B Striving to increase its penetration in rural areas: While P&G is selling the Oral-B toothpaste in urban India, Colgate is striving to increase its penetration in rural areas. Although only 42% of the people living in India’s villages and small towns use toothpaste, the proportion is expected to increase with rising rural income and greater awareness about oral hygiene

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Research Desk through advertisements, dental camps and free dental checkups. Colgate has done well in this regard by building strong distribution strength across rural India. It now has the highest reach among all consumer products companies in the country. 110

Toothpaste Penetration - India

90 70 50 Urban 30

Rural

10 2005

2006

2007

2008

2009

2010

2011

2012

Launching products that target P&G’s new launches: 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 the category is growing at 30%– 40% annually. In the last couple of years, Colgate has launched innovative products such as Colgate Total Pro Gum Health and Colgate Sensitive which will help it compete with Oral-B Pro-Health. New launches + Increased Advertisement spend: P&G’s toothpaste launch has been long awaited. Although it was expected to occur in 2010, the company’s increased focus on core developed markets caused the delay. During this time, 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 spend by 31% during the 1H2013. This has resulted in market share gains in toothpastes, which has growth from ~52% in 2012 to ~56% presently. Strong brand equity: Colgate has been present in India for decades. 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.

Launched: India’s first of its kind whitening toothpaste “Colgate Visible White” The toothpaste segment in India, over the last few months, has seen all FMCG majors bringing out products specifically promising the user whiter teeth. With its Visible White variant, where Colgate claims to offer whiter teeth in just a week, the company joins HUL’ Pepsodent Whitening and Himalayas Sparkling White in the newly emerging beauty segment in the

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Research Desk toothpaste market. The new Colgate Visible White encourages youth who are fashion conscious to use a product that will aid the beauty and life of their teeth which will further enhance their style and boost their confidence.

The oral care market in urban India is around Rs 4,000 Crs and is growing at about 19% per annum, with the basic oral health segment contributing ~65% of the pie, freshness segment ~25%, and sensitive toothpastes ~7%. The new beauty and whitening segment already constitutes ~3% of the overall market. This could be a growing trend as there is increased awareness on personal grooming which is becoming a larger part of the definition of wellness.

A Oral care leader in Toothbrushes too with 41.5% market share Over the years, Colgate has led development in the Oral Care category through technology and innovation. Leading with a market share of 41.5% in the toothbrush category, Colgate constantly aims to grow the toothbrush penetration in the country. To take on P&G’s Oral-B on every front, Colgate has launched SlimSoft, a new product in the ~Rs.1,000 Crs toothbrush market. This follows Colgate’s recent attempt to block the retail space for Oral-B toothpaste in modern trade. The SlimSoft is priced at Rs 50 apiece. Colgate is also pushing a value pack comprising two brushes for Rs 80. Billed a game changer, Colgate claims SlimSoft has slimmer and softer bristles than regular toothbrushes. Though Oral-B also has products with softer bristles, SlimSoft is the first toothbrush with ultra-fine bristles (17 times slimmer tip bristles, according to Colgate). Traditionally, Indians prefer brushes with tough bristles. In recent years, however, dentists have been advocating the need for using a brush with softer bristles. In the past few quarters, Colgate has grown faster in the toothbrush category, partly due to a lower reach in this segment. The average volume growth for Colgate toothbrushes has been 14-15% in the past few quarters, against 9-10% for toothpastes. In 1HCY2013, the company added 270 bps yo-y to its market share in the toothbrush category, against a 120 bps y-o-y rise in its share in the toothpaste segment.

Successful and effective marketing strategies: stepped up advertisement spend by 34% y-o-y in FY13 Colgate’s intense advertising and promotion cost is the highest in the Indian consumer sector ~18-19% of sales which is much higher than the sector average (10-12%). Colgate has leveraged its partnerships with neighborhood stores and supermarkets to offer trial packs as well as helping create awareness among consumers regarding the benefits of oral health care through messages on prescription bags and better in-store displays.

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Research Desk Advt & Distribution exp. as % of Sales

19.0% 18.8%

18.6% 18.4% 18.2% 18.0%

17.8% 17.6% 17.4% 17.2% FY2009

FY2010

FY2011

FY2012

FY2013

Colgate partners with dental care professionals to provide oral health education, free samples and dental screenings to children and their families to promote the use of oral care products. Initiatives such as inviting dental care professionals to tour Colgate's Global Technology Center have helped build credibility for its toothpaste brands. Colgate, in partnership with the Indian Dental Association (‘IDA’) spreads oral health awareness and good oral hygiene practices in small towns by conducting free dental check-ups and distributing free samples.

Healthy Dividend & Bonus history 400

6.0

Dividend (Rs Crs)

350

Div. Yield (%)

300

Avg Dividend Yield 2.5%

5.0

Rs. Crs

200

3.0

150

(%)

4.0

250

2.0

100 1.0

50

FY2013

FY2012

FY2011

FY2010

FY2009

FY2008

FY2007

FY2006

FY2005

FY2004

FY2003

FY2002

FY2001

FY2000

FY1999

FY1998

FY1997

FY1996

FY1995

FY1994

FY1993

FY1992

0.0

FY1991

0

Peer Group snapshot

Source: Capitaline, LMSPL Research

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Research Desk

CONCERNS Stiff competition from other players in the industry. Supplier and distributor relationships and retention of distribution channels

VALUATIONS At the CMP of Rs.1203, the stock is trading at 28.2x FY14E and 23.6x FY15E EPS of Rs.42.72 and Rs.51.05 respectively. We recommend BUY rating on the stock with a 12-18 months Target price of Rs.1532, providing an upside of 27.3%.

FINANCIAL STATEMENT

Source: Company, Capitaline

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