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Published on 23/07/2019 9:18:36 AM | Source: Prabhudas Lilladher Ltd

Hold Colgate Palmolive Ltd For The Target Rs.1,208 - Prabhudas Lilladher

 

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Toothpaste share loss remains a drag

Quick Pointers:

* Domestic Volumes up 4%; domestic sales up 6% as Export sales decline

* Toothpaste share declined ~30bps YTD, toothbrush share has increased. Toothpaste Industry volumes growing at ~5%.

* Rural sales is growing slower than Urban sales, recovery hinges on monsoons.

 

We cut our EPS estimates for FY20 and FY21 by 3.1% and 2.9% due to 1) 4% domestic volume growth on a low base (4% in 1QFY19) 2) Inability to arrest decline in toothpaste market share (down ~30bps YTD) 3) heightened competitive intensity and trade promotions. Colgate is pinning hopes on monsoons and rural demand recovery to accelerate growth in 2HFY20. CLGT needs significant recovery in rural demand and increased traction in CDC and Colgate Swarna Vedshakti to arrest further decline in market share. We expect competitive intensity to remain high given renewed thrust by Patanjali and Vicco Vajardanti.

We believe slowdown in category, poor visibility on pick-up in demand, low growth in premium segment, cannibalization by Swarna Vedshakti and sustained competition will prevent significant increase in growth rates. We estimate 5.5% volume growth and 11.7% PAT CAGR over FY19-21. We value the stock at 36xJune21 EPS and assign a target price of Rs1208 (earlier 1220 at 36xFY21 EPS). Retain “Hold”.

 

Volumes up 4%, PBT from operations up 2.2%: Volumes grew 4% (3% in 4QFY18) despite a moderate base of 4% due to demand slowdown in rural markets. Rural sales is now growing slower than the Urban growth rate. Net sales grew by 4.1% to Rs10.76bn. Export sales has declined in 1Q also. Realisations in 1Q was at 2%, however, Gross margins declined 10bps to 65.6%. EBIDTA increased 6.5% to Rs3bn. EBIDTA margins increased by 60bps as other expenses declined by 130bps despite increase in staff cost and ad-spends by 50bps and 20bps respectively. PBT from operations increased by just 2.2% to Rs2.47bn. Adj. PAT increased 5% to Rs1.7bn due to 66% jump in financial other income. We estimate Impact of IndAs116 resulted in increase in EBITDA by Rs100mn, however it remained Adj. PAT neutral.

Toothpaste share declined by ~30bps: Colgate toothpaste market share declined by 20-30bps YTD on high competitve intensity. Colgate total and Swarna Vedshakti is picking uo share while Sensitive remains muted. Competition in CDC has normalised. Colgate’s share in toothbrush has increased YTD. It launched Colgate Strong teeth with Amino Shakti, Colgate Zig Zag neem toothbrush and Colgate Super Flexi Virat pack in 1Q20.

 

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