Published on 7/12/2019 12:08:52 PM | Source: Motilal Oswal Ltd

Buy Colgate-Palmolive Ltd For The Target Rs.1,815 - Motilal Oswal

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Poised for strong earnings growth over medium term

Inexpensive valuations bolster upside potential

We recently met Colgate’s (CLGT) management to understand its strategy to drive growth amidst changing market dynamics. Key highlights:

* CLGT’s market share has been stable over the past few quarters.

* Volume growth and market share expansion have taken precedence as part of its new strategy, even if it is at the cost of near-term profitability.

* Direct reach has increased by 30% over the past year.

* Good Rabi crop may not necessarily translate into a significant boost for FMCG sector volumes. It may take rural growth at par with urban growth. Anything additional will be a bonus.

* Premiumization is back in focus. No material downtrading is happening either.  No material capex required until Dec’22.

* In our note post the corporate tax cut, we had included Colgate (CLGT) among our top picks. In another note on CLGT earlier this month, we had examined past instances among Indian MNCs where management change heralded a significant change in the strategy for the better. We remain bullish on CLGT from the medium-term perspective, given its reasonable valuations (39.7x 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. Targeting 45x Sep’21E, we maintain our target price of INR1,815 with a Buy rating.


Stable market share over past few quarters

* It was important for CLGT to arrest the hemorrhage in the toothpaste market share before resuming the growth path. In that regard, the company has done well over the past few quarters to maintain a stable market share of 51%-52% (although still below the peak of ~58%), led by:

Launch of a host of herbal products like Cibaca Ved Shakti and Swarna Ved Shakti, as well as the recently launched Charcoal toothpaste. This apart, it has a strong pipeline of products awaiting launch in both the herbal and non-herbal categories.

Slowdown in growth of herbal from ~30% YoY to mid-teens now. CLGT’s market share in herbal is around one third and therefore sharp growth in the salience of the category (now 25-30% of toothpaste market sales) impacted its overall market share.

Direct distribution reach which reportedly expanded by 30% over the past year. At a time when wholesale trade (both rural and urban) is facing pressure, this move would have helped arrest the hemorrhage and is likely to aid growth in market share. While management did not share the number, we believe that CLGT’s direct reach now equals or exceeds 2m outlets, making it the third company apart from HUVR (~3m outlets) and more recently Britannia (~2.1m outlets) to attain that figure.


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