When water is added to Dettol, it turns from a clear yellowish liquid to a milky white emulsion due to the formation of small droplets of oil suspended in the water. This change occurs because Dettol is an emulsion, similar to milk, where light scattering from the droplets creates the milky appearance. The color change is attributed to the way light interacts with the droplets rather than absorption, as most light does not pass through them. The discussion highlights the chemical nature of Dettol and the visual effects of emulsions.