>COLGATE PALMOLIVE (CITI)

Downgrade to Sell: Fundamental Positives Fully Priced In

■ Current valuations are rich, downgrade to Sell — Our downgrade to Sell (from Buy) on CLGT is predicated on: 1) Stock has outperformed peers and the broad market by 35% and 41% respectively in the last year; 2) Current valuation of 23x FY11E P/E implies flawless execution and in our view doesn’t price in dual risks of decelerating growth (lagged monsoon impact) and impact of higher tax rates; 3) Relative P/E to the broad market at 1.5x is at the higher end of the
trailing five-year range, and 4) The specter of a lagged monsoon impact inhibits a further re-rating from current levels.

■ CLGT continues to execute per plan — Key takeaways from recent company meetings: 1) Management not unduly concerned about the monsoons, and think the impact, if any, will be with a 6-12 month lag; 2) Cost pressures remain elevated (up ~7% Y/Y) but sequentially (1QFY10 vs. 4QFY09) have dipped ~3- 5ppt, and have now stabilized at those levels and 3) There is some flexibility on ad spends as these are a function of brand roll outs and competitive intensity.

■ Tweaking estimates — We increase FY10E EPS by 11%, but reduce FY11E by 2%. The increase in FY10E reflects lower ad expenses, while the cut in FY11E reflects a sharp up-tick in the effective tax rate to 25% (from 17% in FY10E). Our FY11E revised estimates are 6% below consensus estimates (Bloomberg); we are in-line with consensus for FY10E.

■ New target price of Rs585 — Our target price is increased to Rs585 (from Rs523) due to: 1) Roll forward from Sept-2010E to Mar-2011E, and 2) Increase target P/E multiple to 21x (from 20x), in-line with other mid-cap companies. Key risks to our Sell include: 1) Ad expenses substantially lower than forecast, and 2) Production at Baddi ramped up, which could lower the effective tax rate.

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