Colgate?s Q4FY11 earnings were ahead of estimates growing 6.1% y-o-y over the comparable base quarter numbers. The reported Q4FY10 numbers are not comparable due to amalgamation of subsidiaries. Toothpaste volume growth remained strong at about 12% y-o-y despite a 3-4% price increase taken during the quarter. Gross margins were under pressure due to increase in packaging and flavour cost and price hikes only partly mitigated the impact.
Ebitda margin was however strong at 21.5% as ad spends came off y-o-y. However, this was expected as Q3FY11 ad spends were very high and hence came off to normalise the spend for the full year.
Management is targeting maintaining Ebitda margins in the face of cost inflation through price hikes and cost saving programmes. Management shared the continued expansion of the on-ground consumer contact programme and the dentist programme. This consistent effort over the past decade has significantly improved the credentials of the brand and would be a key defence against expected increase in competition in the category from new entrants. We retain ?add.?
In Q4FY10, Colgate amalgamated a large subsidiary (a manufacturing unit) with effect from the beginning of the year, adjusting the entire FY10 numbers for the subsidiary in the Q4FY10 reported numbers. We have used the adjusted Q4FY10 numbers given by the management in Q4FY10 for a meaningful Y-O-Y comparison.
We retain ?add? with a 1-year target price of R920. While we expect Colgate to sustain its volume growth trajectory, the increase in raw material costs would limit margin upside possibilities while increase in tax rate would adversely impact earnings growth. We expect 15% CAGR over FY11-13.
IIFL
