Colgate-Palmolive (India)

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Reuters: COLG.NS; Bloomberg: CLGT IN

Colgate-Palmolive (India)

Taking a balanced approach for topline growth

We recently interacted with the management of Colgate-Palmolive (India) Ltd. (CLGT) to get an update on the overall operating environment. The management believes that recent quarters have seen good momentum in growth. Topline growth for FY21 was driven more by volume than pricing. The company will continue to make conscious efforts to ensure a balanced approach towards topline growth. While the second covid wave brought some element of uncertainty in terms of store shutdowns, the company expects the growth momentum to largely continue. Going ahead, while overall pricing remains a growth lever, volume would remain one of the key focus areas, which would be a function of economic condition, rural growth, government schemes, monsoon etc. Over the medium term, increase in per capita consumption remains a big opportunity in the toothpaste category, but it is increasing only gradually. It will require some big initiatives from the market leader to make behavioral changes in consumers to make them increase the frequency of brushing teeth. The company’s strategy to take its Bright Smiles Bright Future (BSBF) campaign to urban areas too can increase urban consumption in future. Resilient rural market and its high saliency (at ~40%) compared to peers also remain an important driver for CLGT in the near term. While we continue to wait, we believe that ultimately the company should be able to see market share gains in the toothpaste portfolio with its strong distribution set-up, focus on innovations and higher advertising spends on the category compared to peers. Along with innovations, it is also building platforms, which the management expects to be meaningful contributors in the medium to long term. Currently, the stock trades at 43.3x/40.4x FY22E/FY23E EPS. We continue to value the company at ~41x on March 2023 EPS, giving us a target price (TP) of Rs1,710 (Rs1,700 earlier). We thus maintain our Accumulate rating on the stock and would become more constructive once we see signs of sustainable improvement in market share in the toothpaste portfolio on an annual basis.

Business & demand environment:

 The management believes that the recent quarters have seen good momentum in growth. While the second covid wave brought some element of uncertainty in terms of store shut downs, the company expects the growth momentum to largely continue. Over the last one year, CLGT has become much more prepared to face restrictions triggered by the second covid wave.

 Going ahead, while overall pricing remains a growth lever, volume would remain one of the key focus areas, which would be a function of economic condition, rural growth, government schemes, monsoon, etc. Rural-urban saliency stands at 40:60 currently.

Oral Care specific commentary:

 While innovations over the recent years may have been towards the premium & naturals (including ingredient specific products) side, re-launches have included key categories & variants like Colgate

Strong Teeth & Colgate Max Fresh.

 Core has seen strong growth in recent times. Even going ahead, the company's efforts towards the core portfolio which is investing on core in terms of communication, distribution and re-formulation, will not change as it is a continuous process.

 Given the high saliency of naturals category within the oral care space, naturals will continue to be a focus area for the company. Naturals segment has grown faster than the overall category in the last few quarters. Presently, CLGT is not a market leader in the naturals segment. The company is looking to drive value growth of premium products through the naturals space.

Marketing plans:

 Extension of the BSBF campaign to the urban areas has started but since schools are closed there are limitations in executing the program.

 Consumption patterns in India are quite different from other countries. While the trend has improved compared to what it used to be five years back, there is further potential in improving the brushing frequency, which would be a gradual process. CLGT has marketing plans in place to enable the same. Distribution:

 CLGT's distribution reach has been one of the widest within the FMCG industry. Total reach stands at ~7mn outlets currently. CLGT had improved its direct reach in FY19. The company generally waits for 2-3 years to see how its position has consolidated before making other changes.

 The company is working to address its under-penetration in the Chemist channel. Margin profile is similar to direct/modern trade.

Commentary on margins and other financials

 CLGT had taken a price hike of 3-4% just before the start of the pandemic (in Feb’20/Mar'20), after which it took a similar hike in Mar'21. Currently, certain raw materials (brent crude, menthol etc.) continue to remain at elevated levels, but CLGT will evaluate the environment before implementing further price hikes.

 Premium portfolio contributes 5-7% to CLGT's overall toothpaste portfolio and hence there is scope for premiumization-driven margin expansion. Going ahead, improved product & SKU mix and premiumization will continue to drive gross margin expansion.

 CLGT does not have any capex plans as of now. It will continue to announce high dividend payouts.  The company continues to look at inorganic opportunities, subject to profitability, value addition to the

existing portfolio and valuation.

ACCUMULATE

Sector: FMCG

CMP: Rs1,686

Target Price: Rs1,710

Upside: 1%

Vishal Punmiya Research Analyst [email protected] +91-22-6273 8064 Videesha Sheth Research Associate [email protected] +91-22-6273 8188 Key Data

Current Shares O/S (mn) 272.0 Mkt Cap (Rsbn/US$bn) 461.8/6.2 52 Wk H / L (Rs) 1,795/1,322 Daily Vol. (3M NSE Avg.) 626,011

Price Performance (%) 1 M 6 M 1 Yr Colgate-Palmolive (India) 4.0 8.2 22.3 Nifty Index 3.9 14.9 53.2 Source: Bloomberg

FY20 Annual Report 4QFY21 Analyst Presentation

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Exhibit 1: Financial summary

Y/E March (Rs mn) FY19 FY20 FY21 FY22E FY23E

Net sales 44,624 45,251 48,412 52,790 56,451 YoY growth (%) 6.6 1.4 7.0 9.0 6.9 EBITDA 12,361 12,017 15,096 15,845 16,972 EBITDA margin (%) 27.7 26.6 31.2 30.0 30.1 Adj. PAT 7,451 8,165 10,354 10,597 11,349 EPS 27.4 30.0 38.1 39.0 41.7 YoY change (%) 8.8 9.6 26.8 2.4 7.1 ROCE (%)* 71.5 65.0 92.5 113.7 121.7 ROE (%) 50.1 53.7 75.0 90.9 97.3 P/E (x) 61.6 56.2 44.3 43.3 40.4 P/B (x) 31.7 28.8 39.3 39.3 39.3 EV/EBITDA (x) 36.8 37.8 29.8 28.4 26.4

Source: Company, Nirmal Bang Institutional Equities Research; *Pre-tax

Exhibit 2: Change in our estimates

Y/E March Earlier Estimates New Estimates Change (%)

(Rs mn) FY22E FY23E FY22E FY23E FY22E FY23E

Net Sales 52,719 56,374 52,790 56,451 0.1 0.1

EBITDA 15,797 16,920 15,845 16,972 0.3 0.3

EBITDA margin (%) 30.0 30.0 30.0 30.1 0.1 0.1

Net Income 10,557 11,297 10,597 11,349 0.4 0.5

Source: Company, Nirmal Bang Institutional Equities Research

Exhibit 3: We are building in ~7% average toothpaste volume

growth for the next two years

Exhibit 4: ….leading to ~8% revenue growth over FY21-23E

9.5 5.5 2.3 -1. 5 2.5 5.0 0.6 5.5 7.5 6.0 -4.0 -2.0 0.0 2.0 4.0 6.0 8.0 10.0 12.0

FY14 FY15 FY16 FY17 FY18 FY19 FY20 FY21 _FY22E _FY23E

Toothpaste volume growth (%) (%) 35 .9 39 .9 38 .7 39 .8 41 .9 44 .6 45 .3 48 .4 52 .8 56 .5 13.2 11.0 -3.0 2.9 5.2 6.6 1.4 7.0 9.0 6.9 -5.0 0.0 5.0 10.0 15.0 0.0 10.0 20.0 30.0 40.0 50.0 60.0

FY14 FY15 FY16 FY17 FY18 FY19 FY20 FY21 _FY22E _FY23E

Revenue (Rs bn) Revenue growth (%)

(%) (Rsbn)

Note: Volume growth in FY21 is our estimate and is based on average of growth rates in the four quarters

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Exhibit 5: We expect gross margins to expand by nominal

~20bps over FY21-FY23E

Exhibit 6: Ad spends are likely to stay above 13%

61 .0 63 .2 61 .8 62 .9 64 .4 65 .1 65 .2 68 .0 68 .0 68 .2 56.0 58.0 60.0 62.0 64.0 66.0 68.0 70.0 FY1 4 FY1 5 FY1 6 FY1 7 FY1 8 FY1 9 FY2 0 FY2 1 FY2 2E FY2 3E Gross Margin (%) (%) 19.2 17.9 11.6 12.9 12.6 12.7 13.8 12.9 13.3 13.3 0.0 5.0 10.0 15.0 20.0 25.0 FY1 4 FY1 5 FY1 6 FY1 7 FY1 8 FY1 9 FY2 0 FY2 1 FY2 2E FY2 3E Ad spends as a % of sales (%)

Source: Company, Nirmal Bang Institutional Equities Research Source: Company, Nirmal Bang Institutional Equities Research

Exhibit 7: EBITDA margin is expected to normalize to 30.1% in

FY23E from 31.2% in FY21

Exhibit 8: We thus expect EBITDA to grow by 6% over FY21-

23E

18 .9 20 .8 24 .3 23 .7 26 .6 27 .7 26 .6 31 .2 30 .0 30 .1 0.0 5.0 10.0 15.0 20.0 25.0 30.0 FY1 4 FY1 5 FY1 6 FY1 7 FY1 8 FY1 9 FY2 0 FY2 1 FY2 2E FY2 3E EBITDA margin (%) (%) 6.8 8.3 9.4 9.4 11.1 12.4 12.0 15.1 15.8 17.0 1.8 22.2 13.2 0.5 17.9 11.1 -2.8 25.6 5.0 7.1 -5.0 0.0 5.0 10.0 15.0 20.0 25.0 30.0 0.0 5.0 10.0 15.0 20.0 FY1 4 FY1 5 FY1 6 FY1 7 FY1 8 FY1 9 FY2 0 FY2 1 FY22E FY23E

EBITDA (Rsbn) EBITDA growth (%)

(%) (Rsbn)

Exhibit 9: We expect Adj. PAT to grow by 4.7% over FY21-23E

due to higher tax rate compared to FY21

Exhibit 10: FCF is likely to grow 30.9% over FY21-23E as there

is no major investments for next couple of years

4.9 5.6 6.1 5.8 6.9 5 7. 8.2 10.4 10.6 11.3 (1.2) 13.9 9.6 (5.7) 18.6 8.8 9.6 26.8 2.4 7.1 -10.0 0.0 10.0 20.0 30.0 0.0 2.0 4.0 6.0 8.0 10.0 12.0 FY1 4 FY1 5 FY1 6 FY1 7 FY1 8 FY1 9 FY2 0 FY2 1 FY2 2E FY2 3E

PAT (Rsbn) PAT growth (%)

(%) (Rsbn) 1.3 3.4 4.2 3.7 4.9 8.8 8.3 7.3 10.3 12.4 0.0 2.0 4.0 6.0 8.0 10.0 12.0 14.0 FY1 4 FY1 5 FY1 6 FY1 7 FY1 8 FY1 9 FY2 0 FY2 1 FY2 2E FY2 3E FCF (Rsbn) (Rsbn)

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Exhibit 11: CLGT will continue to have high dividend payouts Exhibit 12: RoCE (pre-tax) is likely to remain at elevated levels

74.5 60.6 48.8 51.7 95.3 86.7 89.6 99.8 100. 0 10 0. 0 0.0 20.0 40.0 60.0 80.0 100.0 120.0 FY1 4 FY1 5 FY1 6 FY1 7 FY1 8 FY1 9 FY2 0 FY2 1 FY22E FY23E Dividend Payout (%) (%) 12 6.5 11 5.2 95 .6 72 .7 69 .5 71 .5 65 .0 92 .5 11 3. 7 12 1. 7 0.0 20.0 40.0 60.0 80.0 100.0 120.0 140.0 FY1 4 FY1 5 FY1 6 FY1 7 FY1 8 FY1 9 FY2 0 FY2 1 FY22E FY23E RoCE (%) (%)

Our view and valuation

CLGT seems to have maintained sales momentum in the recent quarters when seen from an average basis. On the margin front, the company continued to benefit from gross margin improvement on YoY basis, but margin was affected on QoQ basis due to rising input costs to some extent. It has already taken another price hike in 4QFY21 to offset the impact from cost inflation going forward. Savings in advertising expenditure have led to a sharp expansion in operating margin in the recent quarters. But we believe that ad spends should pick-up going forward to support market share gains in core and also to invest in new brands & categories.

Increase in per capita consumption remains a big opportunity in the toothpaste category, but it is increasing only gradually. It will require some big initiatives from the market leader to make behavioral changes in consumers to make them increase the frequency of brushing teeth. The company’s strategy to take its BSBF campaign to urban areas too can increase urban consumption in future. Higher rural salience (~40%) compared to peers also remains an important driver for CLGT in the near term. But, second covid wave’s impact remains a key monitorable. While we continue to wait, we believe that ultimately the company should be able to see strong market share gains in the toothpaste category with its strong distribution set-up, focus on innovations and higher advertising spends on the category compared to peers. Along with innovations, it is also building platforms, which the management expects to be meaningful contributors in the medium to long term.

Currently, the stock trades at 43.3x/40.4x FY22E/FY23E EPS. We continue to value the company at ~41x on March 2023 EPS, giving us a TP of Rs1,710 (Rs1,700 earlier). We thus maintain our Accumulate rating on the stock and would become more constructive once we see signs of sustainable improvement in market share in the toothpaste portfolio on an annual basis.

Exhibit 13: One-year forward P/E

32.0 36.0 40.0 44.0 48.0 Jun -16 Nov -16 Apr -17 Se p-17 Feb -18 Jul-18 Dec -18 M ay-19 Oct-19 M ar -20 Au g-20 Jan -21 Jun -21

Forward PE Median P/E SD + SD

-(x)

43.2

43.8

40.5

37.8

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Financials

Exhibit 14: Income statement

Y/E March (Rsmn) FY19 FY20 FY21 FY22E FY23E

Gross sales 44,324 44,876 48,105 52,437 56,044

Less: excise duty 0 0 0 0 0

Net Sales (incl. OOI) 44,624 45,251 48,412 52,790 56,451

% Growth 6.6% 1.4% 7.0% 9.0% 6.9% COGS 15,586 15,729 15,494 16,888 17,936 Staff costs 2,959 3,323 3,656 4,038 4,427 Advertising costs 5,647 6,260 6,255 7,027 7,510 Other expenses 8,072 7,922 7,911 8,993 9,606 Total expenses 32,264 33,234 33,316 36,945 39,479 EBITDA 12,361 12,017 15,096 15,845 16,972 % growth 11.1% -2.8% 25.6% 5.0% 7.1% EBITDA margin (%) 27.7% 26.6% 31.2% 30.0% 30.1% Other income 377 492 304 447 483 Interest costs 25 96 73 73 73 Depreciation 1,592 1,979 1,825 2,058 2,215

Profit before tax (before

exceptional items) 11,120 10,434 13,502 14,162 15,166 Exceptional items 305 0 0 0 0 Tax 3,670 2,269 3,148 3,565 3,817 PAT 7,451 8,165 10,354 10,597 11,349 PAT margin (%) 16.7% 18.0% 21.4% 20.1% 20.1% % Growth 8.8% 9.6% 26.8% 2.4% 7.1%

Exhibit 16: Balance sheet

Share capital 272 272 272 272 272 Reserves 14,196 15,670 11,387 11,387 11,387 Net worth 14,468 15,942 11,659 11,659 11,659 Total debt 777 0 0 0 0 Others 0 840 912 912 912 Total liabilities 15,245 16,781 12,570 12,570 12,570 Gross block 21,077 22,182 23,425 24,425 25,925 Depreciation 9,169 10,953 12,778 14,836 17,051 Net block 11,909 11,229 10,647 9,590 8,874 Capital work-in-progress 1987 1900 1449 1449 1449 Investments 312 186 186 279 419 Inventories 2,486 2,969 3,358 3,318 3,512 Debtors 2,098 1,326 1,171 1,508 1,535 Cash 3,994 4,213 8,676 8,662 10,032

Loans & advances 1937 1832 822 1002 1402

Other current assets 1544 2385 2583 2583 2583

Total current assets 12,058 12,725 16,611 17,074 19,065

Creditors 6,132 6,125 7,605 6,690 7,672

Other current liabilities &

provisions 12,058 12,725 16,611 17,074 19,065

Total current liabilities 10,712 9,208 16,370 15,868 17,284

Net current assets 1,346 3,517 241 1,206 1,781

Deferred tax asset -309 -50 48 48 48

Total assets 15,245 16,781 12,570 12,570 12,570

Exhibit 15: Cash flow

PAT 6,977 7,221 9,919 10,598 11,350

Depreciation 1,592 1,979 1,825 2,058 2,215

Other income -233 -266 -79 -374 -410

(Inc.)/dec. in working capital 1,494 -35 -3,826 -979 794

Cash flow from operations 9,830 8,899 7,839 11,303 13,949

Capital expenditure (-) -1,042 -604 -573 -1,000 -1,500

Net cash after capex 8,788 8,295 7,265 10,303 12,449

Inc./(dec.) in investing 0 133 1,060 -93 -140

Others -1,209 702 5,703 404 440

Cash from investments

activities -2,251 231 6,190 -689 -1,200

Dividends paid (-) -7,916 -8,433 -9,211 -10,597 -11,349

Others -231 -478 -353 -31 -31

Cash from financial

activities -8,147 -8,911 -9,565 -10,628 -11,380

Opening cash balance 4,562 3,993 4,213 8,676 8,662

Closing cash balance 3,993 4,213 8,676 8,662 10,032

Change in cash balance -568 219 4,464 -14 1,370

Note: There is significant change in working capital in FY21 due to inclusion of dividend declared (but unpaid as on FY21) in financial assets

Exhibit 17: Key ratios

Y/E March FY19 FY20 FY21 FY22E FY23E Per share (Rs) EPS 27.4 30.0 38.1 39.0 41.7 Book value 53.2 58.6 42.9 42.9 42.9 DPS 23.8 26.9 38.0 39.0 41.7 Valuation (x) EV/sales 10.2 10.0 9.3 8.5 7.9 EV/EBITDA 36.8 37.8 29.8 28.4 26.4 P/E 61.6 56.2 44.3 43.3 40.4 P/BV 31.7 28.8 39.3 39.3 39.3 Return ratios (%) RoCE (Pre-tax) 71.5 65.0 92.5 113.7 121.7 RoE 50.1 53.7 75.0 90.9 97.3 ROIC 78.4 79.4 159.7 474.9 801.1 Profitability ratios (%) Gross margin 65.1 65.2 68.0 68.0 68.2 EBITDA margin 27.7 26.6 31.2 30.0 30.1 EBIT margin 24.1 22.2 27.4 26.1 26.1 PAT margin 16.7 18.0 21.4 20.1 20.1 Liquidity ratios (%) Current ratio 1.1 1.4 1.0 1.1 1.1 Quick ratio 0.9 1.1 0.8 0.9 0.9 Solvency ratio (%)

Debt to Equity ratio 0.1 0.0 0.0 0.0 0.0

Turnover ratios

Total asset turnover ratio (x) 3.4 3.1 4.4 4.9 5.3

Fixed asset turnover ratio (x) 3.7 4.0 4.5 5.5 6.4

Debtor days 56 63 75 72 70

Inventory days 17 14 9 9 10

Creditor days 144 142 162 154 146

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Rating track

Date Rating Market price (Rs) Target price (Rs)

29 September 2017 Accumulate 1,055 1,100 17 October 2017 Accumulate 1,063 1,100 6 February 2018 Accumulate 1,121 1,200 22 May 2018 Accumulate 1,208 1,260 27 July 2018 Accumulate 1,085 1,200 30 October 2018 Accumulate 1,102 1,220 28 January 2019 Accumulate 1,287 1,300 9 April 2019 Accumulate 1,228 1,370 28 May 2019 Accumulate 1,180 1,320 19 July 2019 Accumulate 1,203 1,320 25 October 2019 Accumulate 1,564 1,500 31 January 2020 Accumulate 1,396 1,455 30 March 2020 Buy 1,160 1,470 22 May 2020 Accumulate 1,313 1,375 30 July 2020 Accumulate 1,448 1,460 23 September 2020 Accumulate 1,342 1,500 22 October 2020 Accumulate 1,427 1,520 21 December 2020 Accumulate 1,600 1,610 8 January 2021 Accumulate 1,610 1,660 29 January 2021 Accumulate 1,564 1,675 9 April 2021 Accumulate 1,590 1,675 18 May 2021 Accumulate 1,597 1,700 24 June 2021 Accumulate 1,686 1,710

*Coverage transferred to Vishal Punmiya w.e.f. 19th August 2019

Rating chart

900 1000 1100 1200 1300 1400 1500 1600 1700 1800 Ap r-17 Ju n-17 Au g-17 O ct -17 Ja n-18 M ar -18 M ay -18 Au g-18 O ct -18 D ec -18 M ar -19 M ay -19 Ju l-19 Se p-19 D ec -19 Fe b-20 Ap r-20 Ju l-20 Se p-20 N ov -20 Fe b-21 Ap r-21 Ju n-21

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DISCLOSURES

This Report is published by Nirmal Bang Equities Private Limited (hereinafter referred to as “NBEPL”) for private circulation. NBEPL is a

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Disclaimer

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