17 March 2017
Update
| Sector:
Consumer
Colgate
Buy
BSE SENSEX
29,649
S&P CNX
9,160
CMP: INR989
TP: INR1,170 (+18%)
Great play on rural growth
Government policies in place; watch for normal monsoon
Stock Info
Bloomberg
Equity Shares (m)
52-Week Range (INR)
1, 6, 12 Rel. Per (%)
M.Cap. (INR b)
M.Cap. (USD b)
Avg Val, INRm
Free float (%)
CLGT IN
272.0
1033 / 788
8/-1/-2
269.0
4.0
311
49.0
Financials Snapshot (INR b)
Y/E March
2017E 2018E 2019E
Sales
39.2
44.5
51.3
EBITDA
9.6
11.5
13.8
Adj. PAT
5.9
7.0
8.6
Adj. EPS (INR)
21.7
25.8
31.6
EPS Gr. (%)
-4.4
18.9
22.7
BV/Sh.(INR)
41.5
44.3
48.1
RoE (%)
54.9
60.1
68.5
RoCE (%)
53.8
59.0
67.3
P/E (x)
45.6
38.4
31.3
P/BV (x)
23.9
22.3
20.5
Shareholding pattern (%)
As On
Dec-16 Sep-16 Dec-15
Promoter
51.0
51.0
51.0
DII
8.8
8.5
6.1
FII
16.5
16.2
18.3
Others
23.7
24.3
24.6
FII Includes depository receipts
Stock Performance (1-year)
Colgate-Palm.
Sensex - Rebased
1,100
1,000
900
800
700
We met the management of Colgate Palmolive (India), and as usual, came
back enthused about its longer-term business prospects. The company has
weathered the storm from herbal players like Patanjali, with minimal damage
to its market share in the last three quarters. We believe the sharp dip
towards the end of FY16 was only a small blip in what has been a longer-term
uptrend in market share.
Given its rural dominance, CLGT is a great play on rural recovery. Of the two
components driving rural growth, government schemes are falling in place
and if the monsoon is near-normal this year too, CLGT should see a sharp
revival in earnings growth off a low base. FY15 and FY16 witnessed lower
than normal monsoons and the benefits of the near-normal monsoon in FY17
were washed away by the tide of demonetization.
We remain admirers of the tremendous business franchise CLGT has in India,
with its barriers to entry in the form of distribution reach, brand strength,
single-minded category focus, and category development efforts. It has been
upping the ante on innovation, advertising, and premiumization.
Valuations are lower than the average 3-year and 5-year multiples. We roll
forward to March 2019 numbers, maintain our target multiple at 37x (5%
discount to 3-year average), which begets a target price of INR1,170
(INR1,115 earlier), a 19% upside. CLGT has best-of-breed RoE, strong earnings
growth prospects, and best-in-class dividend yield, which is likely to rise
rapidly now that a major part of the capex is over. We maintain Buy.
Great play on rural growth
The stated management intent is to keep increasing market share every year.
This is what CLGT consistently achieved before the blip last year.
The rural segment would remain the key driver of incremental volume growth
for CLGT in India.
The management believes that CLGT has advantages over peers in terms of
distribution reach (over 5m outlets), brands, and wide product portfolio. Its
massive category development efforts – Bright Smiles Bright Futures and Oral
Healthcare Month – are unmatched, not just in oral care but also across FMCG
peers. CLGT has also expanded massively in rural areas in the past few years,
benefits of which have not been witnessed yet due to the slowdown.
Government policies falling in place; hoping for near-normal monsoon in
FY18
The management believes there are two crucial components for rural growth –
government policies and monsoon. Further, it believes that the first
component is falling into place very well.
Investors are advised to refer through important disclosures made at the last page of the Research Report.
Motilal Oswal research is available on www.motilaloswal.com/Institutional-Equities, Bloomberg, Thomson Reuters, Factset and S&P Capital.
Krishnan Sambamoorthy
(Krishnan.Sambamoorthy@MotilalOswal.com); +91 22 6129 1545
Vishal Punmiya
(Vishal.Punmiya@MotilalOswal.com); +91 22 6129 1547

Colgate
Direct benefit transfer (DBT) would substantially curb leakages from the system
and fuel growth. The 24% increase in rural allocation in the February 2017
budget to INR1,872b is another positive. Implementation of the BJP manifesto in
the state of Uttar Pradesh (UP) would also boost consumption.
FY15 and FY16 had lower-than-normal monsoons, which caused a slowdown in
staples. While FY17 had a near-normal monsoon (CLGT was witnessing healthy
MoM volume growth in August, September and October), demonetization
washed away a lot of the gains. If the monsoon is near-normal this year (too
early to comment, as initial IMD projections would be out in April), with
government support in place, rural demand could see substantial revival.
We also note that in toothpaste, CLGT’s rural market share is higher than its
national market share. Entry barriers are even stronger in the hinterland. A rural
revival wouldn’t just boost CLGT’s volumes, but also boost its overall market
share. 22% of CLGT’s sales come from the INR10 pack, and its
Cibaca
brand is
dominant in the lower-tier cities as well as rural areas.
Urban markets would remain a premiumization story for now
The premium segment continues to grow faster than the market, though not at
as scorching a pace as before.
Segments like sensitivity, teeth whitening, and other specific treatment products
continue to grow at a healthy pace. Another segment that has done very well
for CLGT in recent years is kids’ toothpaste, which is growing at 25-30% off a low
base (currently less than 2% of toothpaste sales).
Going by the experience in other emerging markets, the premiumization
potential in India is huge.
Brushing twice a day could be a big long-term game changer
Last year, CLGT carried out various studies in select markets in South India on
target groups encouraging brushing twice a day. In India, even in urban areas,
only about 20% of the people brush twice a day. Results of the test group
studies have been encouraging.
The company plans to eventually roll out campaigns using lessons from the
target group studies, starting with the metro cities. However, there would be
costs involved in such messaging reinforcement campaigns and the
management would take a call on roll out timelines in the medium term.
Innovation and A&P support to continue
The management also highlighted innovation as a key focus area. A&P support
would continue to be high at least for the next few quarters.
Competition has been high since the 1990s
The management pointed out that competitive intensity has been high since the
1990s, when Hindustan Unilever (HUVR) became aggressive with
Pepsodent
and
Close Up.
Subsequently, the first decade of the new millennium saw the first
wave of competition from herbal players as well as from price warriors.
The current decade witnessed competition in the premium segment from Glaxo,
advent and pullout of P&G in toothpastes through the
Oral B
brand, with HUVR
intermittently becoming very aggressive over the past decade. Yet, CLGT has
2
17 March 2017

Colgate
had a steady improvement in overall market share over a 10-year period,
barring the recent blip. It is able to consistently gain share because even in
smaller segments where it is/was weaker (for example, gels and premium
segment), it has been extremely competitive, retaining the number-2 position
and dominating the broader urban and rural segments.
CLGT is taking both Patanjali and the herbal category very seriously. However, it
is noteworthy that fears of market share loss due to scorching growth in both
these were overblown. The herbal category accounts for only 20% of total
toothpaste sales (up from around 17% the same time last year). Patanjali’s exit
market share in December 2016 was around 4% compared to 2.5% at the end of
December 2015. Over the past three quarters, CLGT’s market share has declined
by a marginal 30bp. Even in the herbal category, a perceived weak area for
CLGT, it has close to 30% market share and is rapidly scaling up.
Barriers to entry remain strong
1.
2.
3.
4.
We believe the reason why CLGT is able to scale up rapidly in relatively weaker
segments and dominate the overall market is the barriers to entry that it enjoys
in terms of:
Distribution reach of over 5m outlets
–
Colgate
toothpaste is the second-best
distributed FMCG brand in India after HUVR’s
Lifebuoy
soap.
Brand strength
– rated among the top-3 brands for 20 years, including being
rated as the top FMCG brand over the past six years.
Category focus
– highest advertisement spend in any single category as well as
investments of huge operating cash flows of over INR6b every year, which peers
cannot match, as oral care for all of them is less than 10% of their sales
compared to 97% for CLGT.
Unparalleled category development efforts
– give CLGT an enviable edge in
attracting the incremental customer over peers.
Digital presence increasing
7% of CLGT’s advertising spends are already on digital. Digital accounts for
majority of spend for a youth brand like
Colgate Max Fresh
and nearly all of it’s
spending on new age brands like
Colgate Visible White.
While digital spend is scaling up rapidly and is cheaper than television
advertisements, the management continues to expect television to be the
predominant part of ad spend over the next few years.
Geared for GST implementation
We believe CLGT’s indirect tax incidence is 23-24% and the company would be a
beneficiary of GST. The management stated that they have no update on what
rate would apply to CLGT or whether the government would have an anti-
profiteering clause. The company began preparing for GST 12-15 months ago.
With SAP as partner, it has been readying its channel for the shift and is
confident of being ready for GST by the scheduled July 1, 2017 implementation.
17 March 2017
3

Colgate
Story in Charts
Exhibit 1: Colgate has lost 190bp market share over the last
4 reported periods in toothpaste
Toothpaste Market Share (%)
Exhibit 2: Toothbrush market share has been increasing on a
constant basis
Toothbrush Market Share (%)
Source: Company, MOSL
Source: Company, MOSL
Exhibit 3: Directly covered rural outlets have been nearly
doubled in 4 years
Rural India - Number of stores under direct coverage (mm)
1.4
1.3
1.1
1.0
0.8
Exhibit 4: Increase in rural distributor sales representatives
Rural India - Distributor Sales Reps
1581
1372
1046
353
2011
2012
2013
2014
2015
2012
2013
2014
2016
Source: Company, MOSL
Source: Company, MOSL
Exhibit 5: Large increase in number of villages covered
Rural India - Village Coverage ('000)
54
41
22
58
Exhibit 6: Rural distribution vans grew 3x over 2012-16
Rural distribution vans
3x
340
2012
2013
2014
2016
2012
801
2013
951
2014
1,031
1,014
Source: Company, MOSL
2015
2016
Source: Company, MOSL
17 March 2017
4

Colgate
Exhibit 7: Volume growth to recover in FY18 and FY19
Volume growth (%)
13.2%
Exhibit 8: ….as will be the case with sales growth
Sales (INR b)
18.2% 17.5%
14.9%
11.6%
3.2%
Sales growth (%)
13.3%
15.3%
13.0
FY11
14.5
FY12
10.3
FY13
9.5
FY14
5.5
FY15
2.3
(1.3)
7.0
9.0
FY11
FY12
FY13
FY14
FY15
-3.9%
FY16 FY17E FY18E FY19E
Source: Company, MOSL
FY16 FY17E FY18E FY19E
Source: Company, MOSL
Exhibit 9: After a tepid FY17 EBITDA growth will be strong in
FY18 and FY19
EBITDA (INR b)
22.2
13.6
6.8
1.8
14.1
9.6
1.7
EBITDA growth (%)
20.5
Exhibit 10: Led by 220bp EBITDA margin increase between
FY16-FY19E
EBITDA margin (%)
24.6
23.0
21.7
21.0
18.9
FY11
FY12
FY13
FY14
FY15
FY16 FY17E FY18E FY19E
Source: Company, MOSL
20.8
25.5
24.2
26.8
19.3
11.4
5.2
5.3
5.9
6.7
8.3
9.5
11.5
13.8
FY11 FY12 FY13 FY14 FY15 FY16 FY17E FY18E FY19E
Source: Company, MOSL
Exhibit 11: Leading to healthy PAT growth as well
PAT (INR m)
PAT growth (%)
18.9%
10.9% 11.3%
-0.3%
-1.2%
FY11
FY12
FY13
FY14
FY15
-4.4%
FY16 FY17E FY18E FY19E
Source: Company, MOSL
13.9%
10.4%
22.7%
Exhibit 12: And causing gradual recovery in gross FATR
4.6
Fixed Asset t/o (x)
3.6
3.8
4.3
3.1
2.4
2.1
2.2
2.5
FY11 FY12 FY13 FY14 FY15 FY16 FY17E FY18E FY19E
Source: Company, MOSL
17 March 2017
5

Colgate
Exhibit 13: High capex during period of slowdown in
demand had pulled down fixed asset turns…
Capex (INR b)
3.6
2.9
1.1
0.2 0.2 0.2
-0.3
FY11
Source: Company, MOSL
FY12
FY13
FY14
FY15
FY16 FY17E FY18E FY19E
Source: Company, MOSL
0.9 0.9
2.3
1.0 1.0
61
48
3.0
74
73
74
Exhibit 14: …and also led to decline in payout levels in
recent years, with lower capex, payout set to rise again
Dividend Payout (%)
74
70
70
70
0.7
0.5
Exhibit 15: Capex intensity led to decline in RoE…
113
109
107
90
RoE (%)
Exhibit 16: …and RoCE, both of which will recover
RoCE (%)
119
113
112
94
83
68
54
59
67
82
69
55
60
68
FY11
FY12
FY13
FY14
FY15
FY16 FY17E FY18E FY19E
Source: Company, MOSL
FY11
FY12
FY13
FY14
FY15
FY16 FY17E FY18E FY19E
Source: Company, MOSL
Exhibit 17: 3 Years Colgate Palmolive PE (x)
50.0
45.0
40.0
35.0
30.0
39.9
33.1
PE (x)
Peak(x)
Avg(x)
45.4
Min(x)
Exhibit 18: 5 Years Colgate Palmolive PE (x)
52.0
44.0
38.2
36.0
28.0
37.8
PE (x)
Peak(x)
Avg(x)
Min(x)
45.4
38.2
30.5
Source: Company, MOSL
Source: Company, MOSL
17 March 2017
6

Colgate
Exhibit 19: Valuation matrix of coverage universe
Company
Consumer
Asian Paints
Britannia
Colgate
Dabur
Emami
Godrej Consumer
GSK Consumer
HUL
ITC
Jyothy Labs
Marico
Nestle
P&G Hygiene Industries
Page Ind.
Parag Milk
Pidilite Inds.
United Brew.
United Spirits
Retail
Jubilant Foodworks
Shopper's Stop
Titan Company
Reco
Price Mkt Cap EPS Growth YoY (%)
P/E (x)
EV/EBITDA (x)
RoE (%) Div. (%)
(INR) (USD M) FY17E FY18E FY19E FY17E FY18E FY19E FY17E FY18E FY19E FY17E FY17E
15.9
5.9
4.1
7.4
3.6
8.7
3.5
29.9
49.4
1.0
5.8
9.0
3.4
2.5
0.3
5.5
3.1
4.9
1.1
0.4
6.3
8.1
2.6
-4.4
2.6
-2.9
11.0
-5.6
1.1
8.6
84.7
8.3
-1.0
12.1
12.9
4.6
12.7
-5.4
71.2
-14.3
-29.8
15.0
13.3
15.5
18.9
13.8
22.0
16.2
13.4
11.7
13.5
18.6
16.5
21.3
15.0
29.5
37.7
9.9
44.0
64.1
74.6
95.8
4.6
16.8
22.0
22.7
16.9
20.6
16.0
6.7
15.4
14.0
16.8
18.8
18.8
18.6
27.3
25.1
12.3
29.1
36.1
33.5
57.7
16.1
53.2
45.1
45.6
38.1
43.1
45.6
35.1
46.8
33.6
48.0
48.2
52.3
46.8
62.1
31.2
42.2
72.9
76.9
86.1
82.1
50.1
47.0
39.0
38.4
33.5
35.4
39.3
30.9
41.9
29.6
40.4
41.4
43.1
40.7
48.0
22.7
38.4
50.6
46.9
49.3
41.9
47.8
40.3
32.0
31.3
28.6
29.3
33.9
29.0
36.3
25.9
34.6
34.8
36.3
34.3
37.7
18.1
34.2
39.2
34.4
37.0
26.6
41.2
34.2
33.0
27.4
30.9
31.5
32.7
24.2
32.6
21.6
26.8
33.6
32.8
30.5
39.6
13.4
28.1
30.0
37.0
28.2
19.2
36.3
30.8
28.2
22.8
27.1
27.4
28.4
21.0
29.6
18.8
23.7
29.0
26.1
26.1
30.4
10.8
24.9
24.5
27.6
19.2
14.1
34.0
26.4
22.2
18.8
23.0
23.0
24.8
18.6
25.6
16.1
21.1
24.5
21.3
21.7
24.0
9.5
21.7
19.3
21.6
14.6
10.2
28.7
32.5
42.9
54.9
28.3
33.8
22.4
25.1
67.6
28.4
15.7
33.3
35.9
29.0
41.3
10.8
28.0
12.6
20.8
10.4
4.2
21.2
1.1
0.8
1.5
0.9
1.0
0.7
1.0
2.1
1.9
1.1
1.0
0.9
0.9
0.7
0.0
0.7
0.1
0.0
0.2
0.0
0.6
Neutral 1,078
Buy
3,240
Buy
989
Neutral 278
Buy
1,055
Neutral 1,681
Neutral 5,533
Neutral 902
Buy
281
Neutral 363
Buy
293
Neutral 6,205
Buy
6,824
Buy
14,641
Neutral 219
Neutral 701
Buy
778
Buy
2,202
Neutral
Neutral
Neutral
1,104
336
462
Note: For Nestle FY16 means CY15
Source: Company, MOSL
17 March 2017
7

Colgate
Financials and Valuations
Income Statement
Y/E March
Net Sales
Change (%)
COGS
Gross Profit
Gross Margin (%)
Operating expenses
Other Operating Income
EBITDA
Change (%)
Margin (%)
Depreciation
Financial Other Income
Profit before Taxes
Change (%)
Margin (%)
Tax
Deferred Tax
Tax Rate (%)
Adjusted PAT
Change (%)
Margin (%)
Non-rec. (Exp)/Income
Reported PAT
2014
35,449
14.9
14,020
21,429
59.6
15,128
484
6,785
1.8
18.9
508
358
6,636
0.1
18.7
1,683
47
26.1
4,906
-1.2
13.8
492
5,399
2015
39,548
11.6
14,677
24,871
62.4
16,920
340
8,290
22.2
20.8
750
264
7,804
17.6
19.7
2,009
205
28.4
5,590
13.9
14.1
0
5,590
2016
38,016
-3.9
14,953
23,063
60.0
14,051
451
9,463
14.1
24.6
1,114
336
8,685
11.3
22.8
2,325
191
29.0
6,169
10.4
16.2
-313
5,855
2017E
39,246
3.2
15,003
24,242
61.1
15,075
458
9,625
1.7
24.2
1,313
357
8,669
-0.2
22.1
2,774
0
32.0
5,895
-4.4
15.0
0
5,895
2018E
44,471
13.3
16,852
27,619
61.5
16,603
465
11,481
19.3
25.5
1,445
430
10,465
20.7
23.5
3,454
0
33.0
7,012
18.9
15.8
0
7,012
(INR Million)
2019E
51,259
15.3
19,196
32,063
62.0
18,697
472
13,838
20.5
26.8
1,520
524
12,842
22.7
25.1
4,238
0
33.0
8,604
22.7
16.8
0
8,604
Balance Sheet
Y/E March
Share Capital
Reserves
Net Worth
Deferred Liability
Capital Employed
Gross Block
Less: Accum. Depn.
Net Fixed Assets
Capital WIP
Investments
Curr. Assets, L&A
Inventory
Account Receivables
Cash & Bank
Others
Curr. Liab. and Prov.
Account Payables
Other Liabilities
Provisions
Net Current Assets
Application of Funds
E: MOSL Estimates
2014
272
5,727
5,999
-178
5,821
9,927
-4,368
5,559
1,415
371
7,364
2,257
547
2,870
1,690
8,889
5,100
2,837
952
-1,525
5,821
2015
272
7,431
7,703
26
7,729
12,829
-5,013
7,816
1,412
371
7,420
2,522
696
2,545
1,657
9,290
5,144
2,874
1,272
-1,870
7,729
2016
272
9,923
10,195
217
10,412
15,773
-5,691
10,081
784
301
8,270
2,927
1,015
2,883
1,445
9,025
5,519
2,399
1,106
-755
10,412
2017E
272
11,006
11,278
217
11,495
18,773
-7,004
11,769
784
301
8,094
3,007
1,169
2,387
1,532
9,452
5,542
2,519
1,391
-1,358
11,495
2018E
272
11,769
12,041
217
12,258
19,773
-8,450
11,323
784
301
10,315
3,371
1,192
4,088
1,664
10,465
6,224
2,645
1,597
-150
12,258
(INR Million)
2019E
272
12,824
13,096
217
13,313
20,773
-9,970
10,803
784
301
13,134
3,835
1,374
6,117
1,808
11,709
7,101
2,777
1,830
1,425
13,313
17 March 2017
8

Colgate
Financials and Valuations
Ratios
Y/E March
Basic (INR)
EPS
Cash EPS
BV/Share
DPS
Payout %
Valuation (x)
P/E
Cash P/E
EV/Sales
EV/EBITDA
P/BV
Dividend Yield (%)
Return Ratios (%)
RoE
RoCE
RoIC
Working Capital Ratios
Debtor (Days)
Asset Turnover (x)
Leverage Ratio
Debt/Equity (x)
2014
18.0
19.9
22.1
13.4
74.5
2015
20.6
23.3
28.3
12.5
60.6
2016
22.7
26.8
37.5
11.0
48.4
2017E
21.7
26.5
41.5
15.2
70.0
2018E
25.8
31.1
44.3
18.0
70.0
2019E
31.6
37.2
48.1
22.1
70.0
54.8
49.7
7.5
39.2
44.8
1.4
48.1
42.4
6.7
32.1
34.9
1.3
43.6
36.9
7.0
28.1
26.4
1.1
45.6
37.3
6.8
27.7
23.9
1.5
38.4
31.8
6.0
23.0
22.3
1.8
31.3
26.6
5.1
19.0
20.5
2.2
90.1
93.5
16,067.6
5
8.8
81.6
82.5
236.5
6
6.7
68.9
68.0
120.5
8
4.1
54.9
53.8
78.1
9
3.8
60.1
59.0
89.0
8
4.0
68.5
67.3
125.1
8
4.2
0.0
0.0
0.0
0.0
0.0
0.0
Cash Flow Statement
Y/E March
OP/(loss) before Tax
Int./Div. Received
Interest Paid
Direct Taxes Paid
(Incr)/Decr in WC
CF from Operations
(Incr)/Decr in FA
Free Cash Flow
(Pur)/Sale of Investments
CF from Invest.
Change in Equity
(Incr)/Decr in Debt
Dividend Paid
Others
CF from Fin. Activity
Incr/Decr of Cash
Add: Opening Balance
Closing Balance
E: MOSL Estimates
2014
6,785
-358
0
-1,683
480
5,224
-3,587
1,637
100
-3,487
-75
0
-4,221
1,140
-3,156
-1,418
4,288
2,870
2015
8,290
-264
0
-2,009
20
6,037
-2,898
3,139
0
-2,898
-38
0
-3,848
422
-3,464
-325
2,870
2,545
2016
9,463
-336
0
-2,325
-777
6,025
-2,316
3,709
70
-2,246
394
0
-3,758
-76
-3,440
339
2,545
2,883
2017E
9,625
-357
0
-2,774
108
6,602
-3,000
3,602
0
-3,000
0
0
-4,812
714
-4,098
-496
2,883
2,387
2018E
11,481
-430
0
-3,454
494
8,091
-1,000
7,091
0
-1,000
-526
0
-5,723
860
-5,389
1,701
2,387
4,088
(INR Million)
2019E
13,838
-524
0
-4,238
453
9,529
-1,000
8,529
0
-1,000
-526
0
-7,023
1,049
-6,500
2,029
4,088
6,117
17 March 2017
9

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10