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Focused execution to drive RoE improvement
Colgate-Palmolive India (CLGT) is the market leader in the toothpaste segment, with a share of ~52.5%.
Stable market share over past few quarters: CLGT has been able to arrest the hemorrahage in the toothpaste market share after three years. Over the past few quarters, it has been able to maintain a stable market share of 51%-52% (although well below the peak of ~58%), led by (i) launch of a host of herbal products, (ii) sharp growth in the herbal category where CLGT has one-third market share, (iii) 30% YoY expansion in direct distribution reach, (iv) sharp increase in adspends/ promotion and (v) revival in both premium and mass end segments.
Key beneficiary of corporate tax rate cuts: CLGT will be key beneficiary of corporate tax rate cut as it can spend a majority of INR850-1,150m incremental PAT by way of promotions/ price-offs in order to gain market share. None of its competitors would have such windfall gains to match CLGT, otherwise they would end up bleeding. Importantly, this tax cut offers multiyear benefits to CLGT, till peers scale up. We believe CLGT is waiting for demand revival before passing the benefits.
Focus back on volume growth, market share expansion: With new CEO – Mr. Raghavan, CLGT’s focus is back on volume-led growth, even if it is at the cost of near-term profitability. His plan is to drive category growth and premiumization. Revival in premiumization and absence of significant down-trading augurs well for realization growth. We assume 5.5% volume growth for FY20 in line with management expectation but believe growth can be in high single digits in subsequent years.
No capex required till FY22E to support PAT growth: CLGT had created significant capacity between FY14-17 before the onslaught of herbal players, which delayed capacity utilization pick-up. Thus, it doesn’t need any material capex until FY22E. Even if volumes recover to high singledigits (with some market share recovery) from low to mid-single digits, PAT growth will be much higher than EBITDA/topline growth.
Valuation & view: According to management, while oral care will continue to be by far the largest chunk of sales in India, non-oral care could be a double-digit sales contributor over the next 10 years. We remain bullish on CLGT from the medium-term perspective, given its reasonable valuations (39.4x FY21E EPS - a huge discount to MNC peer multiples of 50x-56x), likely escalation in earnings momentum and sharp potential improvement in the already impressive RoCE. Maintain Buy with Target Price of INR1,814 (45x Sep'21E). Risks: (1) Weak monsoons, (2) Any market share loss and (3) Further slowdown in rural.
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