EQUITY RESEARCH AND ANALYSIS OF COLGATE PALMOLIVE

SUBMITTED BY

Name: SALONI THAKKER Roll No. M-10-60 MASTER OF MANAGEMENT STUDIES Batch: 2010 - 2012

IES Management College and Research Centre, Bandra, Mumbai

IES Management College and Research Centre Bandra, Mumbai

May June 2011

Students Declaration
I hereby declare that this report, submitted in partial fulfillment of the requirement for the award for the Master of Management Studies, to IES Management College and Research Centre is my original work and not used anywhere for award of any degree or diploma or fellowship or for similar titles or prizes.

I further certify that without any objection or condition subject to the permission of the company where I did my summer project, I grant the rights to IES Management College and Research Centre to publish any part of the project if they deem fit in journals/Magazines and newspapers etc without my permission.

Place

: Mumbai

Date

: 15th July, 2011

_______________________
Signature

Name
Class

: SaloniThakker
: Master of Management Studies 2|Page

Semester II

Roll No. : M-10-60

Certificate
This is to certify that the dissertation submitted in partial fulfillment for the award of Master of Management Studies of IES Management College and Research Centre is a result of the bonafide research work carried out by Ms. SaloniThakker under my supervision and guidance. No part of this report has been submitted for award of any other degree, diploma, fellowship or other similar titles or prizes. The work has also not been published in any journals/Magazines.

Date: Place: Mumbai Industry guide Signature of the Industry Guide: ______________ Name of Industry Guide: Ms. Richa Bhardawaj Company Designation : Corporate Bridge : Manager Content Development

Internal Faculty guide Signature of Internal faculty guide: ______________ Name of the internal faculty guide: Gazia Sayed Core Faculty IES Management College and Research Centre 3|Page Prof.

Acknowledgement
Written words have an unfortunate tendency to convert genuine gratitude into stilted formality and no person has ever prayed heartily without learning something.These acknowledgements are one way where I can thank the people who have been instrumental in the making of this project. Working on the Equity research and analysis, has been a wonderful learning experience for me and for this very wonderful experience I would like to thank a lot of people without whose cooperation and support working on this summer project report would not have been so pleasurable and interesting. I am deeply indebted to Ms. Richa Bhardawaj Manager Content Development, my industry guide at Corporate Bridge for providing me with this opportunity to understand the process of doing an equity research by guiding me right till the end. I would also like to thank Prof. Gazia Sayed, Core faculty, IES Management College and Research Centre for helping me throughout my project, guiding and always motivating me to perform better. Her advice and patience is appreciated. Without their encouraging support, valuable suggestions and timely inputs, this project would never have been possible and I would have been deprived of a vast treasure of knowledge. Also I would like to thank my family and friends who have been a constant support all throughout this project

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TABLE OF CONTENTS

1. Executive Summary 2. Introduction to Equity research ..8 2.1) Meaning of Equity Research . 2.2) Equity Research Analyst 2.3) Equity research Report ....... 8 11 13

3. Introduction to Valuation.. 3.1)Meaning of Valuation .. 15 3.2)Methods of Valuation 16 4. Information on Corporate bridge .. 5. Introduction of Colgate Palmolive 6. Research report 7. Conclusion ........ 8.Bibliography ........

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20 24 28 53 54

1) Executive summary
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Corporate Bridge Academy (CBA) is a global full-service training firm, providing instructor-led training and e-learning services to professionals from top investment banks and financial institutions, colleges and students. They provide training in various fields like equity research, investment banking, sector analysis, CFA 1, CFA 2 and many more. Corporate bridge also prepares Equity research analysis where they prepare and sell equity research reports. Equity Research is the area which deals with the live economy. EquityResearch is a field that has evolved and transformed the Financial Sectorover the Past few decades. With the Capital market in doldrums,sentiments and confidence reaching all-time lows, investors are goingback to fundamental and technical analysis which seems to have taken aback seat from past few years. Equity research is studying about a particular sector or industry in detail to use its historicals that is its past financial statements forecast its future revenues, income, expenses, cash flows etc. It requires analyst to view various management discussion ,market scenario ,and all other information related to the area of study . Equity Research helps the investor to know about the value, risk &volatility of the covered security, and thus assist investors to decidewhether to buy, hold, sell, sell short, or simply avoid the security inquestion. Equity research reports are prepared by research analysts and then sold to various institutions like mutual fund investors or many other investment banks ,these reports are also published on various websites by companies and help investors decide on what to do with a particular stock.

2) INTRODUCTION EQUITY RESEARCH 2.1 Meaning of equity research

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Definition of equity: In the context of a futures tradingaccount, it is the value of the securities in the account, assuming that the account is liquidated at the going price. In the context of a brokerage account, it is the net value of the account, i.e. the value of securities in the account less any margin requirements. Definition of equity research:Equity research gives insight into companies to help investors make educated stock picks. This topic covers the latest information on equity research and investing. Equity Research is aimed at identifying the opportunities for wealth creation and anequity analyst tries to identify undervalued or overvalued stocks through both his/ her expertise and by use of available research tools. An appropriate valuation of securities is imperative for arriving at the right investment decisions. Investment brings back high returns and value. It is crucial and critical for any organization or business to invest for growth. You might be confident of your investment plans but there is always a doubt about the company in which you are investing. Equity Research is the answer to avoid any kind of investment risk. Equity Research focuses on company-specific research and analysis. Industry and sector- teams analyze companies in the stock markets of the region to develop investment ideas. These sector teams also work with macro, quantitative and derivatives research teams to identify investment ideas Equityresearch is conducted through studying a composite of financialrecords, news stories and interviews with companyinsiders

Role and importance of equity research

The role of research is to provide information to the market. Information is the lifeblood of efficient and transparent markets. An efficient market relies on information: a lack of information creates inefficiencies that result in stocks being
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misrepresented (over or under valued). Analysts use their expertise and spend a lot of time analyzing a stock, its industry and peer group to provide earnings and valuation estimates. Research is valuable because it fills information gaps so that each individual investor does not need to analyze every stock. Research is particularly important for smaller companies that often have fewer analysts covering their securities in comparison to their larger peers. The availability of equity research can have a significant impact on a companys visibility and investors understanding of its performance. Increased analyst coverage has been found to have a positive influence on liquidity and market capitalization and ultimately reduce the cost of capital for companies which otherwise might achieve lower valuations. A good indicator of the value of equity research is the amount institutional investors and hedge funds are willing to pay for it.

Types of equity / securities research

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Securities research is a discipline within the financial services industry. Securities research professionals are known most generally as "analysts," "research analysts," or "securities analysts". Securities analysts are commonly divided between the two basic kinds of securities: equity analysts (researching stocks and their issuers) and fixed income analysts (researching bond issuers). Securities analysts are usually further subdivided by industry specialization (or sectors) -- among the industries. Fixed income analysts are also often subdivided by asset classamong the fixed income asset classes.

Differentiating equity research

Securities research falls into two broad categories:

Provided by investment banks -- Offer research as part of a broad set of financial services including broking and corporate finance.

Provided by independent equity research boutiques -- This research has largely sprung into existence as a result of scandals such as Enron, Lernout & Hauspie and Worldcom.

Equity research companies in India

1.Almondz 2. Emkay Research 3. India Infoline 5. Motilal Oswal 8. DSP Merrill Lynch 9. JP Morgan Equity 10. CLSA 11. Morgan Stanley 12. IL&FS Investsmart
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14. HDFC Securities 15. SSKI 16. ENAM Edelweiss Research 17. ICICI Securities 18. Pranav Securities 19. Share khan 20. KJMC

2.2 Equity research analyst

An individual who carries out equity research is called an equity research analyst.A financial analyst, securities analyst, research analyst, equity analyst, or investment analyst is a person who performs financial analysis for external or internal clients as a core part of the job. Equity Research analysts follow stocks and make recommendations on whether to buy, sell, or hold those securities using various analysis. Equity research analysts conduct financial statement analysis and build financial models to derive a company's proper valuation. Ideally, research analysts must be as objective as possible, however different market, economic, and political influences can adversely affect equity research.

TYPES OF ANALYSTS Securities analysts are generally one of three types:

Sell-side analysts -- who work for a broker-dealer and indirectly for broker-dealer's trading customers Buy-side analysts -- who work for institutional investors, such as hedge funds, mutual funds, pension funds, proprietary trading operations of banks and brokers, endowments, and insurance companies),

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Independent analysts -- who work for firms which sell research to sell-side and/or buy-side firms, but who do not themselves engage in securities transactions.

TYPES OF ANALYSIS There are three major types of analysis that an analyst uses which are mentioned as under :-

Fundamental analysis
A method of evaluating a security by attempting to measure its intrinsic value by examining related economic, financial and other qualitative and quantitative factors. Attempt to study everything that can affect the security's value, including macroeconomic factors (like the overall economy and industry conditions) and individually specific factors (like the financial condition and management of companies). Most sell-side analysts perform fundamental analysis. They try to determine a specific asset value. (Overbought/Oversold)

Technical Analysis (Chartists)

A method of evaluating securities by analyzing statistics generated by market activity, such as past prices and volume. Do not attempt to measure a security's intrinsic value, but instead use charts and other tools to identify patterns that can suggest future activity.

Quantitative Analysis (Quants)

A method that seeks to understand behavior by using complex mathematical and statistical modeling, measurement and research. By assigning a numerical value to variables, quantitative analysts try to replicate .

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In the broadest terms, securities analysts seek to develop, and thereafter communicate to investors, insights regarding the value, risk, and volatility of a covered security, and thus assist investors to decide whether to buy, hold, sell, sell short, or simply avoid the security in question or derivative securities

2.3 EQUITY RESEARCH REPORT

What is an Equity Research Report? Equity research report also called as Securities research report is a report written by a brokerage or research firms for its clients in order to help their investors to make investment decisions in a share/stock. An equity research report includes an analysis of the company, industry and provides sufficient information based on which an investor can take a decision. Equity research report What an equity research report has? Many of us think about how to write an equity research report. An equity research report usually has the following information a) Company Overview b) Key Highlights c) Industry Snap Shot d) News Analysis e) Financial Analysis f) Risk Factors g) Valuation Methodology h) Investment rationale Normally most of the equity research reports have this information; however there is no hard and fast rule in which an equity research report should be written. The content varies from companies to companies. Finally the report provides a target price based on complete analysis. Equity research report Disclaimer
1. Every equity research report has disclaimers some are as follows

a) Every equity research report wholly reflects views and personal opinion of the equity research analyst as on the date of
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publication; b) Equity research analyst does not have interest in the shares of the company. c) Remuneration of the equity research analyst is not linked directly to any specific research recommendations contained in the report.
Equity research report How reliable are they?

An equity research analyst writes equity research report based on the information available. Available information means all the information available to public or through databases like Factiva, Lexis Nexis, OneSource, Newspaper websites, Industry body website etc. The analysis/view of the equity research analyst depends on his/her way of analysis and the optimal usage of available information. Every report is written based on many assumptions and current scenario. Expertise of the equity research analyst and the research house is the most important criteria before relying on a research report. You cannot rely completely on an equity research report for an investment decision, however these reports offers good piece of advice and analysis which is definitely helpful. Equity research report Should I buy stocks? Buying stocks based on the recommendations provided by the equity research report is not recommended in the initial days of investment. My suggestion is subscribe to an equity research report and keep a track on how many times the stock price recommended by the stock analyst reached the targeted price. Based on the track record, you can make a decision to buy stocks based on recommendations. As I mentioned earlier, a stock price target is given based on assumptions and information, if any assumption proves wrong, the stock will not reach the targeted price

3) INTRODUCTION TO VALUATION 3.1 Meaning of Valuation

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In finance, valuation is the process of estimating what something is worth. Items that are usually valued are a financial asset or liability. Valuations can be done on assets (for example, investments in marketable securities such as stocks, options, business enterprises, or intangible assets such as patents and trademarks) or on liabilities (e.g., bonds issued by a company). Valuations are needed for many reasons such as investment analysis, capital budgeting, merger and acquisition transactions, financial reporting, taxable events to determine the proper tax liability, and in litigation. Valuation of financial assets is done using one or more of these types of models:
1. Absolute value models that determine the present value of an asset's expected

future cash flows. These kinds of models take two general forms: multiperiod models such as discounted cash flow models or single-period models such as the Gordon model. These models rely on mathematics rather than price observation.
2. Relative value models determine value based on the observation of market

prices of similar assets.

3. Option pricing models are used for certain types of financial assets (e.g.,

warrants, put options, call options, employee stock options, investments with embedded options such as a callable bond) and are a complex present value model. The most common option pricing models are the Black-ScholesMerton models and lattice models. Common terms for the value of an asset or liability are fair market value, fair value, and intrinsic value. The meanings of these terms differ. For instance, when an analyst believes a stock's intrinsic value is greater (less) than its market price, an analyst makes a "buy" ("sell") recommendation and vice versa.

3.2 Valuation Methods

Discounted cash flows method This method estimates the value of an asset based on its expected future cash flows, which are discounted to the present (i.e., the present value). This concept of discounting future money is commonly known as the time value
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of money. The size of the discount is based on an opportunity cost of capital and it is expressed as a percentage. This percentage is calledthe discount rate. For a valuation using the discounted cash flow method, one first estimates the future cash flows from the investment and then estimates a reasonable discount rate after considering the riskiness of those cash flows and interest rates in the capital markets. Next, one makes a calculation to compute the present value of the future cash flows Guideline companies method This method determines the value of a firm by observing the prices of similar companies (guideline companies) that sold in the market. Those sales could be shares of stock or sales of entire firms. The observed prices serve as valuation benchmarks. From the prices, one calculates price multiples such as the price-to-earnings or price-to-book value ratios. Next, one or more price multiples are used to value the firm. For example, the average price-toearnings multiple of the guideline companies is applied to the subject firm's earnings to estimate its value. Many price multiples can be calculated. Most are based on a financial statement element such as a firm's earnings (price-to-earnings) or book value (price-to-book value) but multiples can be based on other factors such as price-per-subscriber.

Income Approach The income approach to business valuation values a company by estimating some measure of its earning power in the future and converting that measure to a present value based on an investors required rate of return on the investment considering the risk of the investment. The measure of earning power most frequently used is net cash flow, which represents the amount that an owner could take out of the business over time without jeopardizing it as a going concern.
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 Net asset value method The third common method of estimating the value of a company looks to the assets and liabilities of the business. At a minimum, a solvent company could shut down operations, sell off the assets, and pay the creditors. Any cash that would remain establishes a floor value for the company. This method is known as the net asset value or cost method. Normally, the discounted cash flows of a well-performing exceed this floor value. However, some companies are "worth more dead than alive", such as weakly performing companies that own many tangible assets. This method can also be used to value heterogeneous portfolios of investments, as well as non-profit companies for which discounted cash flow analysis is not relevant. The valuation premise normally used is that of an orderly liquidation of the assets, although some valuation scenarios (e.g. purchase price allocation) imply an "in-use" valuation such as depreciated replacement cost new.

In the equity analysis research report for valuation of the company the methods used are as follows Income approach we calculated various ratios of the company like solvency ratios, turnover ratios leverage ratios and then made certain assumption either on y-o-y basis or as a percentage of sales method and found out the expected sources of revenue and expenses.

Discounted cash flow method wherein we assumed the terminal growth rate and then found the beta value and calculated the cost of equity and cost of capital and WACC and thus found out the share price

Guideline companys approach where we used the relative valuation we selected 4 competitors namely HUL, Godrej Consumer, Dabur and Marico from the same sector FMCG and similar products and compared them on the basis of its market capitalization, Gross profit, Expenses, Equity value ,Enterprise value and many more this gave a clear picture about the companys performance in accordance to its peers.

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4 ) INTRODUCTION TO THE COMPANY

Headquartered in Mumbai and formed by graduates from leading institutes (IITs, IIMs & AIM), Corporate Bridge Academy (CBA) is a global full17 | P a g e

service training firm, providing instructor-led training and e-learning services to professionals from top investment banks and financial institutions, colleges and students. With unparalleled experience (CLSA India, KPMG, YES Bank, JPMorgan, SBI Capital Markets, CRISIL etc) and comprehensive capabilities (MBA, CFA, FRM, CAs) across all industries and business functions, combined with entrepreneurial spirit, we commit to deliver a world class professional training services that endure and improves efficiency. "Corporate Bridge" as the name suggest, helps in bridging the gap between the aspiring entrant and the corporate. In today's economic outlook era, India has seen perceptible improvement due to the measures taken to restore the global financial system in the aftermath of the financial crisis. Over here, Corporate Bridge Academy plays an important role in educating the aspirants about the financial aspects. Corporate Bridge Academy deals with various financial courses viz. Equity Research, Investment banking, Private Equity, Fundamental Analysis, Investment Research, Credit Research etc. Corporate Bridge Academy also prepares students for CFA Level I & II and FRM Level I & II. The main goals of these courses are to enable students and professionals to enhance their financial analysis skills through practical examples and exercise.

TRAINING PROGRAMS BY CORPORATE BRIDGE Corporate Bridge Academy conducts training program in various ways which is given as under

1. Workshops and seminars: Corporate Bridge's Instructor Led training bridges the gap between academics and the real world to equip students and professionals with the practical financial skill set that they will need on the job. Students learn various financial concepts in Excel from scratch using intuitive,

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step-by-step instruction and model templates the way it is actually performed at investment banks. 2. Online training Corporate Bridge provides Intuitive, Self-Paced and Comprehensive Online Finance training for MBA's and Professionals pursuing careers inInvestment Banking, Private Equity, Corporate Finance, Asset Management, Equity Research, Hedge Funds 3. Corporate training Corporate Bridge is a global full-service financial training firm, providing instructor-led training and e-learning courses to investment banks, financial institutions, Fortune 100+ companies, and other firms across India. 4. University training Corporate Bridge provides real-world, hands-on finance and investment banking seminars at some of the most prestigious academic institutions and corporations across India. Corporate Bridge Academy's training programs have attracted working professionals from top notch firms like J. P. Morgan, Citigroup, RBS, LIC, Religare securities, Reliance capital, Nomura, SSJ Securities, J M Financial, ICICI Securities, DBOI, HDFC Securities, CRISIL, Grid Stone, ICICI PRU, Mitsubishi, BSE, NSE, India Bulls Securities Capgemini, Corporation Bank, Cognizant, Central Bank Of India, India Infoline Ltd, Edelweiss, HDFC Bank, IDBI Bank, Tata Capital, Reliance Money, CNBC, TCS, E&Y, Birla Sunlife etc. to name a few. We have also conducted in-house training for firms like CLSA India,Capvent India etc. Candidates of Corporate Bridge Academy have been preferred by firms like ICICI Direct, Share Khan, Adventity, Accenture, CARE Ratings, KR Choksey, SMC etc. for employment. Corporate Bridge Academy has also conducted training programs and seminars at some of the most prestigious academic institutions and corporations in the world, including IIM Lucknow, IIM Indore, IIT Delhi, IIT

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Kanpur, MDI Gurgaon, FMS Delhi, NITIE, NMIMS, BSE, Indian Institute of Capital Markets etc.

CLIENTS OF CORPORATE BRIDGE CORPORATES

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 INSTITUTIONS

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5) INTRODUCTION TO THE COMPANY

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COLGATE PALMOLIVE

Introduction Colgate-Palmolive Company an American diversified multinational corporation focused on the production, distribution and provision of household, health care and personal products, such as soaps, detergents, and oral hygiene products (including toothpaste and toothbrushes). Under its "Hill's" brand, it is also a manufacturer of veterinary products. The company's corporate offices are on Park Avenue in Midtown Manhattan, New York City. Origin In 1806, William Colgate, himself a soap and candle maker, opened up a starch, soap and candle factory on Dutch Street in New York City under the name of "William Colgate & Company". William Colgate in 1833 suffered a severe heart attack stopping his business from selling. But after a couple of years of recovery he continued with his business. In the 1840s, the firm began selling individual cakes of soap in uniform weights. In 1857, William Colgate died and the company was reorganized as "Colgate & Company" under the management of Samuel Colgate, his son, who did not want to continue the business but thought it would be the right thing to do. In 1872, Colgate introduced Cashmere Bouquet, a perfumed soap. In 1873, the firm introduced its first toothpaste, aromatic toothpaste sold in jars. His company sold the first toothpaste in a tube, Colgate Ribbon Dental Cream, in 1896. In 1896, Colgate hired Martin Ittner and under his direction founded one of the first applied research labs. By 1908 they initiated mass selling of toothpaste in tubes. Since 1976, Colgate has worked in close partnership with the Indian Dental
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Association (IDA) to spread the message of oral hygiene to children across the country under its Bright Smiles, Bright Futures Schools Dental Education Program. This program has successfully reached more than 83 million school children covering around 1,73,000 schools in 250 towns across the country since its launch. The program focuses on children so that the message of good oral hygiene is carried home to families and the community at large.

The journey towards growth he small soap and candle business that William Colgate began in New York City early in the 19th century is now, more than 200 years later, a truly global company under the name of COLGATE PALMOLIVE serving hundreds of millions of consumers worldwide.Today, Colgate has numerous subsidiary organizations spanning 200 countries, but it is publicly listed in only two, the United States and India. The Company has grown to Rs.2200crore plus organization with an outstanding record of enhancing value for its strong shareholder base. The company dominates the Rs.4100crore Indian toothpaste markets by commanding more than 50% of the market share. It spread across 4.5 million retails outlets out of which 1.5 million are direct outlets. The Company is having four wholly owned subsidiaries namely Colgate-Palmolive (Nepal),Multimint Leasing & Finance and Jigs Investments and Passion Trading & Investment Company. In 2003, Colgate was ranked Indias Most Trusted Brand across all categories by Brand Equitys Most Trusted Brand Survey conducted in conjunction with Neilsen a position it held in succession for four consecutive years from 2003 to 2007 and has been the only brand in the top three coveted position in all the 8 surveys conducted since 2001. Prior to this, Colgate was also rated as the #1 brand by the A&M MODE Annual Survey for Indias Top Brands for eight out of nine years during the period 1992 to 2001 In 2004, as an additional effort to create awareness for good oral hygiene Oral
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Health Month (OHM), was introduced. Since its launch, OHM is conducted each year during September / October, where free dental checkups are conducted by Colgate in partnership with IDA across the country. Conducted in designated towns and cities to establish and promote the importance of good oral hygiene, OHM is Colgates mass consumer contact program. In November 2007, it acquired a 75% equity interest in Advanced Oral Care Products, Professional Oral Care Products and SS Oral Hygiene Products. The company is regularly coming up with new products and has been a consistent financial performer.

In 2009, Colgate-Palmolive (India) was adjudged as the Best Value Creator (Mid Cap Category) in the 2009 Outlook Money NDTV Profits Awards.

Colgate-Palmolive has long been in fierce competition with Procter & Gamble, the world's largest soap and detergent maker. P&G introduced its Tidelaundry detergent shortly after World War II, and thousands of consumers turned from Colgate's soaps to the new product. Colgate lost its number one place in the toothpaste market when P&G started putting fluoride in its toothpaste. But that didn't stop Colgate.

Product portfolio of colgate Oral care-Under this segment the company offers product like toothpastes, toothbrush, tooth powder & tooth whitening products. Personal care -In this segment it offer products skin care, hair care, body wash & shaving creams Household care-Under this segment it has launched brand AXIOM-a dish washing paste.

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It has also introduced new products namely Colgate dental floss,ORAGARD-B a mouth ulcer cream etc.
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