Colgate-Palmolive (India)

Recommendation

GNAM Investment Competition

Presented by Stamford Bulls
 SELL
Key Data Financial Summary (Rs. Bn) Price Performance Chart
No. of Shares: 0.27 Bn Particulars FY17 A FY18 A FY19 P FY20 P
1300
1250
Mkt Cap: Rs. 310 Bn Net Sales 39.82 41.88 46.28 51.37 1200

CMP: Rs. 1,141 1150

EBIDTA 9.57 11.22 12.21 13.45 1100
Face Value: Rs. 1 1050
PAT 5.72 6.74 7.62 8.56 1 year return = +2.83%
1000

Diluted EPS 21.23 24.80 28.02 31.48 950

900

Source: DCF analysis, Moneycontrol

 Valuation Summary
DCF - Perpetuity Approach Rs Bn
1,350.00
Long term growth rate (g) 5%
DCF Comp. Valuation 1,281.70
Terminal value 388.68
1,250.00
Valuation
1,214.01 1,207.94 10-year CAGR (FCFF) 10%
Enterprise value 223.17
1,150.00 Current Market Price 1,141 Less: Net Debt (4.87)
Equity value 228.05
1,118.47
Diluted shares 0.27 Bn
1,050.00 Target Price 1,035
Equity value per share 838.41
1,015.10
950.00 971.21
907.93 Reverse DCF - Perpetuity Rs Bn
Approach
850.00 Long term growth rate (g) 5%
Terminal value 948.57
10-year CAGR (FCFF) 19%
750.00
Enterprise value 305.52
709.63 Less: Net Debt (4.87)
650.00 Equity value 310.39
DCF Value at 4x-6x P/E (Comps) at 27x-34x at EV/EBIDTA (Comps) at 24- 52 Week Market High/Low
Perpetuity Range EPS 36 28x Diluted shares 0.27 Bn
Equity value per share 1,141.13

Source: DCF analysis, relative comps; industry averages

 Market Risks

Colgate prices grossly underperformed in 2018 FIIs, Banks and Insurance Cos Net Seller

Dec 2017 Jun 2018

FII 13.92% 11.49%

Banks and Insurance Cos 8.93% 8.48%

Mutual Funds 3.68% 6.84%

Source: Religare Research

Global Headwinds to Indian Markets

• Stretched Valuations
CNX Nifty Colgate Dabur HUL • Election Risks
3 months 6.54% -7.60% 20.86% 1.06%
• Tumbling Currency
1 year 12.72% 2.83% 30.57% 47.34%
• Rising Oil Prices
Source: NSE, Moneycontrol
 FMCG Market Driven by Rural Demand

• India’s FMCG industry grew at 12% in FY18 Rural FMCG Market (US$ billion) Urban – Rural Industry Breakup
(FY2017-18)
250
• Rural Markets are the key growth Drivers
Expected CAGR 28% in
200
• 45% revenue share in FY2018 Rural FMCG Market

150
• 72% market penetration vs. 95% in urban US$ 52.75 45%
55% billion
markets 100

• Sensitive to prices 50

• FMCG rural segment revenue forecasted 0

Urban Rural
to grow by 15% in FY19 compared to 10% 2009 2010 2011 2012 2013 2015 2018 2025F

in FY18

Source: Neilsen Report, IBEF India Report, Crisil Report

 Toothpaste Segments

Toothpaste
45,000 18,000

40,000 38,650 38,126 38,036 16,000

37,800 37,895
36,473 37,004 36,860 36,775 36,578 36,303 37,445

Segments
36,007 35,802 35,916
35,000 14,000

30,000 12,000
10,051
9,689
25,000 10,000
8,854
7,682
20,000 8,000
• Herbal, Whitening, Freshness, 5,820 6,057
6,636

Sensitive, and the rest 15,000 4,985 5,241 6,000

4,489
3,963 4,212
3,637 3,806 3,806
• Herbal toothpaste undergoing 10,000 4,000

explosive growth since 2014 5,000 3,051 3,212 3,240 3,337 3,275 3,307 3,020 3,303 3,334
3,352 3,499 3,491 3,603
3,834 3,808
2,000

• Entire toothpaste market - -

growth driven by herbal Q1 '14 Q2 '14 Q3 '14 Q4 '14 Q1 '15 Q2 '15 Q3 '15 Q4 '15 Q1 '16 Q2 '16 Q3 '16 Q4 '16 Q1 '17 Q2 '17 Q3 '17

Rest Herbal Whitening Freshness Sensitive

• Growth expected in Herbal &
Sensitive in 5-7 years Segments Share
Sensitive Herbal Rest
Current 15% 25% 60%
Expected in next 5-7 years 30% 45% 25%

Source: Nielsen Report

Growth Segments

Colgate is losing out on high margin and growth segments

Herbal Sensitive
 Dabur controlling the segment (66%)  High margin segment

 Patanjali driving growth (CAGR 63.6%)  Sensodyne controls the market and is growing
share (70%)

Note: All data is YTD’17 Oct v/s YTD’14 Oct

Source: Nielsen Report and GSK
 Toothpaste Market Share

Consistent loss of market share in the Colgate’s market share has been dented by herbal
toothpaste segment indicates Colgate’s brands such as Patanjali and Dabur
poor innovation pipeline compared to peers 70
56.1 57.0 57.4 55.6
6.5% 60 52.7 54.5 53.7
7.4%
50

40
15.4%
30 23.3 23.5 22.8
53.4% 21.3 19.6 19.1 17.6
20
17.3% 14.8 14 13.4 13.4 13.9 15.3 15.5
10
6.7
as of Mar‘18 0.6 1.3 2.8
0 0.0 0.1 0.4
2011 2012 2013 2014 2015 2016 2017
Colgate HUL Dabur Patanjali Ayurved Others HUL Dabur Patanjali Colgate

Source: Colgate’s Investor Presentation and Analyst Reports

 Colgate Natural Products

Cibaca and Swarna Vedshakti are the indigenous Cibaca priced at a 9% premium to Dant Kranti
brands in the ayurvedic segment Swarna Vedshakti cheapest in the premium segment

100.0 90.0
90.0

Prices in Rs/100Gms
80.0
70.0 62.5
60.0 55.0
50.0
50.0 43.8 46.0
40.0
40.0
30.0
20.0
10.0
0.0
Patanjali Colgate Dabur Dabur Colgate Lever Patanjali
Dant Cibaca Red Meswak Swarna Ayush Dant
Kranti Vedshakti Vedshakti Anti Kranti
cavity Advance
clove oil
However, none of the brands were launched pan-India
(Cibaca is largely North-India focused and SWARNA VEDSHAKTI is South-India focused)
Source: Colgate’s Investor Presentation and Analyst Reports
Colgate’s Strategy in 2013 – Oral-B

Colgate’s PAT margin decreased to 14% in FY15 Colgate’s marketing expenses increased by 40%
from 16.6% in FY12 y/y in 2014
6,000 17.0% 45.0% 40.4%
16.6%
16.5% 40.0%
5,000
15.7% 16.0% 35.0%
4,000 15.5% 30.0%
15.1%
15.0% 25.0%
3,000 17.8% 19.2%
14.5% 20.0%
2,000 14.0% 15.0% 19.2%
14.0% 15.5% 17.0%
13.5% 10.0% 15.3%
1,000 3.8%
13.0% 5.0%
- 12.5% 0.0%
2012 2013 2014 2015 2012 2013 2014 2015
PAT (INRmn) PAT margin (%) Advertising exp. (% of sales) Advertising growth (%)

Colgate responded by increasing it’s media spend at the cost of profitability to retain market share

Source: Annual Report

 A Different Strategy

PAT margin increased to 18% in 1QFY19 from 13.8% Increase in profitability was however through
in 1QFY18 curtailed media spending

Market share will be difficult to retain without adequate marketing expenditure

Source: Annual Report
 Competitors’ Strategy

• Science-based Ayurveda Herbal Rural

specialist Positioning Strategy

• 6.4 mn outlets nationwide

• Solid customer base: yoga
• Coverage of 42,000 villages Distribution Aggressive Guru being promoter
Network Marketing
• Project Buniyaad; consumer • Sense of trust and satisfaction
engagement programmes of being healthy
Cross-segments layout & comprehensive products portfolio
Increasingly competitive
• People Data Centre: big data market
analysis
Shift of consumer
Customer
• New launches of natural preference
Centricity
variants within existing portfolio
of products

Innovation
Innovation driven trend
• High scale media deployment Brand Naturals
Commu-
Source: Research Report • WiMi and CCBTs strategies nication Strategy
 Diversified Competitors

Food, refreshments &

Personal care (47%) Home care (33%)
others (20%)

Source: Annual Report

 Change in Management Strategy

Feb 2012-Sep 2015

Served as Chairman
Colgate Strategy for Oral-B

“Deoras comes back to a role in India at a

Sep 2015-Aug 2018
time when the company is losing some of its
Mukul Served as Chief Marketing
Deoras Officer of Colgate-Palmolive shine due to rising competitive intensity led
Company
by herbal and natural brands like Patanjali
Ayurved Ltd’s Dant Kanti toothpaste”
Sep 2018-Present
Serving as Chairman

Mukul Deoras was appointed as chairman effective 01 Sep 2018

Source: Annual Report and Company announcements

 Strengths

Toothpaste Category Pack Size (Value Cont %)

100% • Excellent brand recognition
90% 23
26 • Well established distribution network
80%
70% • Successful low user pack (LUP) test
60% 33 34
• Cibaca in North India
50%
40% • Vedshakti in South India
30% 21
20%
32 • Future plans to roll out pan India
10% 21 • Cash rich company
9
0%
YTD'14 YTD'17
<30gms 3gms-50gms 50gms-100gms >100gms

Source: Nielsen Report

 Taking all the facts into consideration,
our recommendation is to

SELL
Conclusion Target Price : Rs 1,035
Q&A
Annexure : DCF Analysis for Colgate Palmolive

Rs in Bn 2017A 2018A 2019A 2020A 2021A

TOI 39.82 41.88 46.28 51.37 57.27

Gross Profit Margin 62.9% 64.4% 64.5% 64.6% 64.7%

EBDITA 9.57 11.22 12.21 13.45 14.87

PAT 5.72 6.74 7.62 8.56 9.71

FCFF 7.60 8.42 9.55 10.87 12.26

Annexure : WACC Computation Annexure : Sensitivity Analysis

Beta 0.5 Long term growth rate (g)

Risk Free Rate 8% WACC 4.0% 5% 6.0%

Risk Premium 5% 13% 537 599 627

Required Return (Equity) 11% 12% 612 700 742

Cost of Debt - 11% 710 838 908

WACC 11% 10% 844 1056 1170

9% 1,039 1,412 1,642

Source: DCF Analysis

Financial Parameters – Base Case
For year ended/ ending March 31 2017 2018 2019 2020 2021
Audited Audited Projected Projected Projected Price Range Low Diff. High
No of Months 12 12 12 12 12
Total operating income 3,982 4,188 4,628 5,137 5,727 DCF Value at 4x-6x Perpetuity Range 710 198 908
Growth % 5.2% 10.5% 11.0% 11.5%
EBIDTA 957 1,122 1,221 1,345 1,487 P/E (Comps) at 27x-34x at EPS 36 971 243 1214
EBIDTA/TOI (%) 24% 27% 26% 26% 26%
Interest - - - - -
EV/EBIDTA (Comps) at 24-28x 1,118 89 1,208
Depreciation & Amortization 133 157 138 139 129
Gross Operating Profit 2,506 2,698 2,985 3,318 3,706
Gross Operating Profit Margin 62.9% 64.4% 64.5% 64.6% 64.7%
52 Week Market High/Low 1,015 267 1,282
Non-operating income 41 39 38 53 69
PBT 846 984 1,113 1,250 1,418 Target Price - - 1,035
PAT 572 674 762 856 971
PAT Margin 14.4% 16.1% 16.5% 16.7% 17.0%
Net fixed assets 1,275 1,304 1,329 1,344 1,359
Tangible Networth (TNW) 1,274 1,525 1,610 1,918 2,025
Total Debt - - - - - Sensitivity Analysis
Total current assets 887 1,092 1,236 1,628 1,838
Total current liabilities 983 983 1,084 1,201 1,337 EPS Revenue growth rate
Current ratio (times) 0.90x 1.11x 1.14x 1.36x 1.37x
28.02 6% 7% 10% 12% 13%
Free cash flow 760 842 955
ROCE (%) 61% 60% 65% 61% 65% 63% 25.24 25.47 26.16 26.62 26.85
Net debt (325) (487) (587) (909) (1,037)
Net profit margin 14% 16% 16% 17% 17% 64% 26.36 26.60 27.32 27.80 28.04
Return on assets (ROA) 25% 26% 28% 27% 28% Gross
Return on book equity (ROE) 45% 44% 47% 45% 48% Profit 65% 27.48 27.73 28.48 28.98 29.23
EBIT 810 956 1,075 1,197 1,349 Margin
Capital Employed 1,328 1,581 1,666 1,975 2,081 66% 28.04 28.30 29.06 29.57 29.83
Cash 325 487 587 909 1,037
EPS 21.23 24.80 28.02 31.48 35.71 66% 28.60 28.86 29.64 30.16 30.42

Assumptions 67% 29.72 29.99 30.80 31.34 31.62

Advertising Expense 13.00% 13.10% 13.00% 13.10% 13.20%
Employee Expenses 7.30% 7.40% 7.30% 7.40% 7.50%
Other operating expense 19.13% 17.98% 18.00% 18.10% 18.20%
Financial Parameters – Best Case
For year ended/ ending March 31 2017 2018 2019 2020 2021
Audited Audited Projected Projected Projected
No of Months 12 12 12 12 12 Price Range Low Diff. High
Total operating income 3,982 4,188 4,691 5,253 5,884
Growth % 5.2% 12.0% 12.0% 12.0%
DCF Value at 4x-6x Perpetuity Range 817.58 237.16 1,054.75
EBIDTA 957 1,122 1,238 1,385 1,551
EBIDTA/TOI (%) 24% 27% 26% 26% 26% P/E (Comps) at 27x-34x at EPS 36 1,012.55 253.14 1,265.68
Interest - - - - -
Depreciation & Amortization 133 157 140 142 132
EV/EBIDTA (Comps) at 24-28x 1,151.21 92.19 1,243.40
Gross Operating Profit 2,506 2,698 3,072 3,446 3,866
Gross Operating Profit Margin 62.9% 64.4% 65.5% 65.6% 65.7%
Non-operating income 41 39 38 53 69 52 Week Market High/Low 1,015.10 266.60 1,281.70
PBT 846 984 1,127 1,288 1,478
PAT 572 674 772 882 1,013
PAT Margin 14.4% 16.1% 16.5% 16.8% 17.2%
Target Price 1,080
Net fixed assets 1,275 1,304 1,329 1,345 1,360
Tangible Networth (TNW) 1,274 1,525 1,611 1,929 2,039
Total Debt - - - - -
Total current assets 887 1,092 1,232 1,643 1,863 Sensitivity Analysis
Total current liabilities 983 983 1,079 1,207 1,349
Current ratio (times) 0.90x 1.11x 1.14x 1.36x 1.38x EPS Revenue growth rate
Free cash flow 763 871 998
ROCE (%) 61% 60% 65% 62% 67% 28.39 6% 7% 10% 12% 13%
Net debt (325) (487) (582) (916) (1,049)
63% 24.13 24.35 25.00 25.44 25.66
Net profit margin 14% 16% 16% 17% 17%
Return on assets (ROA) 25% 26% 28% 28% 29% 64% 25.24 25.47 26.16 26.62 26.85
Return on book equity (ROE) 45% 44% 48% 46% 50% Gross
EBIT 810 956 1,089 1,235 1,409 Profit 65% 26.36 26.60 27.32 27.80 28.04
Capital Employed 1,328 1,581 1,667 1,985 2,095 Margin
Cash 325 487 582 916 1,049 66% 26.92 27.17 27.90 28.39 28.64
EPS 21.23 24.80 28.39 32.43 37.23
66% 27.48 27.73 28.48 28.98 29.23
Assumptions
Advertising Expense 13.00% 13.10% 14.00% 14.10% 14.20% 67% 28.60 28.86 29.64 30.16 30.42
Employee Expenses 7.30% 7.40% 7.30% 7.30% 7.30%
Other operating expense 19.13% 17.98% 18.00% 18.00% 18.00%
 Financial Parameters – Weak Case
For year ended/ ending March 31 2017 2018 2019 2020 2021
Audited Audited Projected Projected Projected Price Range Low Diff. High
No of Months 12 12 12 12 12
DCF Value at 4x-6x Perpetuity Range 447 114 561
Total operating income 3,982 4,188 4,439 4,706 4,988
Growth % 5.2% 6.0% 6.0% 6.0%
EBIDTA 957 1,122 1,070 1,120 1,171
P/E (Comps) at 27x-34x at EPS 36 766 375 1,141
EBIDTA/TOI (%) 24% 27% 24% 24% 23%
Interest - - - - -
Depreciation & Amortization 133 157 132 127 112 EV/EBIDTA (Comps) at 24-28x 935 74 1,010
Gross Operating Profit 2,506 2,698 2,819 2,983 3,157
Gross Operating Profit Margin 62.9% 64.4% 63.5% 63.4% 63.3%
Non-operating income 41 39 38 53 69 52 Week Market High/Low 1,015 267 1,282
PBT 846 984 967 1,036 1,119
PAT 572 674 662 710 766
PAT Margin 14.4% 16.1% 14.9% 15.1% 15.4% Target Price - - 817
Net fixed assets 1,275 1,304 1,328 1,342 1,354
Tangible Networth (TNW) 1,274 1,525 1,600 1,857 1,943
Total Debt - - - - -
Total current assets 887 1,092 1,201 1,492 1,709
Total current liabilities 983 983 1,058 1,124 1,193 Sensitivity Analysis
Current ratio (times) 0.90x 1.11x 1.14x 1.33x 1.43x
Free cash flow 654 677 726 EPS Revenue growth rate
ROCE (%) 61% 60% 56% 51% 50%
24.35 6% 7% 10% 12% 13%
Net debt (325) (487) (572) (824) (908)
Net profit margin 14% 16% 15% 15% 15% 63% 23.79 24.01 24.65 25.08 25.30
Return on assets (ROA) 25% 26% 24% 23% 23%
Return on book equity (ROE) 45% 44% 41% 38% 39% 64% 24.91 25.14 25.81 26.27 26.49
EBIT 810 956 929 983 1,050
Gross
Capital Employed 1,328 1,581 1,656 1,914 2,092 Profit 65% 26.03 26.26 26.97 27.45 27.68
Cash 325 487 572 824 1,000 Margin
66% 26.59 26.83 27.55 28.04 28.28
EPS 21.23 24.80 24.35 26.10 28.18
66% 27.15 27.39 28.13 28.63 28.87
Assumptions
Advertising Expense 13.00% 13.10% 12.60% 12.60% 12.60% 67% 28.26 28.52 29.29 29.81 30.07
Employee Expenses 7.30% 7.40% 8.00% 8.10% 8.20%
Other operating expense 19.13% 17.98% 19.00% 19.10% 19.20%