Colgate Palmolive – Tax issues hit on EPS

Income tax benefit on Colgate’s manufacturing unit at Baddi is set to reduce from 100% to 30% from FY11 onwards. The management has clarified that no further investments would be made to restore these benefits. We expect the company’s effective tax rate to move up to 25% from 16% currently and cut earnings estimates by 7-9% over FY11-12CL.

Colgate’s conservative pricing strategy (realisation growth was only 2% in FY09) has been a key growth driver in FY09. While the softening in key inputs has helped the company, management expects a sequential rise in prices of key inputs viz. Sorbitol, packaging (tubes) in the coming quarters.

Smaller pack strategy has aided Colgate’s growth in rural areas and it has also
launched Rs10/pack (Mar-09) after the success of Rs5/pack (Jan-08). Over the
last two months, HUL has turned more aggressive on the oral care category with an 30% price reduction in Pepsodent 40gm SKU. Also, HUL has increased
weight of 40gm Close-Up to 50gm keeping the pack price unchanged at Rs15.

Colgate is likely to report an EPS of Rs 25.5 26.6 for 10 and 11 respectively. near Term stock is likely to UNDER PERFORM until clarity emerges from management.