>COLGATE-PALMOLIVE INDIA (MORGAN STANLEY)

Q1: Sustains Growth Momentum; Margin Expands on Lower Adspend

Quick comment: Beats expectations: Colgate reported 14.8%, 30.2% and 42.9% revenue, operating profits and net profit growth for Q1F10, ahead of our expectations of 13%, 23% and 24%, respectively. Toothpastes volume growth was robust at 14% with overall volume growth at 12% for the quarter. Colgate’s strategy of focusing on its core business rather than diversifying into new categories has been working well, especially in the context of the under-penetration that characterizes the oral care segment in India.

455 bps decline in adspend ratio results in 300 bps expansion in OPM: EBITDA grew by 30% yoy as advertising spend fell 16% yoy. We believe the current level of adspend to sales ratio of 12.5% is unlikely to be sustainable as competitive activity (by the #2 and #3 players in the toothpaste market) is likely to increase in the space. Surprisingly, despite some price increases
and benign input cost environment, gross profit margin contracted marginally by 80 bps, partly on account of relatively adverse mix. MS Colgate Input Cost Index was up 1.2% yoy for the quarter.

Other income and lower depreciation buoy PAT: Other income rose 175% yoy while depreciation rose marginally by 2.2% yoy. Sequentially, depreciation declined by about 11% as there was no incremental capex. Tax rate was lower by about 340 bps, as higher production from the Baddi facility resulted in greater tax benefits. Overall net income rose by 43% yoy.

Market share rose to 52.3% by volume: Market share in toothpastes increased to 52.3% for Jan-May09 (it was 52.2% during Jan-Mar09). For toothbrushes, market share improved to 38.2% while for the toothpowder category, the market share stood at 48.8% for the Jan-May09 period.

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