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Margins under pressure; high ad spends for growth…

About the stock: Colgate-Palmolive (India) (CPIL) is the largest oral care company in India. The company has more than 50% market share in the toothpaste category. The major brands include Colgate Dental Cream, Colgate Total, Colgate Max-Fresh. With the changing consumer preference for naturals products, the company is focusing on growing Colgate Vedshakti brand. Recently, it has launched toothpaste for Diabetics, Colgate Vedshakti Oil Pulling & Vedshakti mouth spray.

* Colgate has distribution reach of 6.5 million outlets. The company commands one of the highest gross margins in the industry and spends ~13% of sales on marketing to support existing brands and new launches

Q2FY22 Results: Colgate reported muted numbers during the quarter.

* Sales were up 5.3% YoY, supported by low base quarter

* EBITDA was at | 400.6 crore, down 2.1% YoY, with margins at 29.6%

* Consequent PAT was at | 269 crore (down 1.9% YoY)

What should investors do? Colgate’s share price has given a return of 57% last five years (from | 973 in October 2016 to | 1532 in October 2021)

* We slightly revise our numbers downwards with margins under pressure due to increasing crude based raw material prices & higher ad-spends

* We continue to maintain our BUY rating on the stock

Target Price and Valuation: We value the stock at | 1800, valuing the business at 40x FY24 earnings.

Key triggers for future price performance:

* Naturals toothpaste brand Colgate Vedshakti to drive volume growth

* CPIL saw 460 bps operating margin expansion in FY21 due to favourable sorbitol prices. With the sharp increase in crude based packaging cost, we believe operating margins have peaked out in the medium term

* It is aggressively spending on marketing (13% of sales), which would support new launches in the personal care & naturals portfolio

Alternate Stock Idea: Besides CPIL, we like Zydus Wellness in our FMCG coverage.

* It is growing at a steady pace in nascent categories with strong presence in health, nutrition space & margin expansion possibilities

* Trading at significant discount to FMCG peers. BUY with a TP of | 2,800

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