IGI Logo

Surprise potential and low expectations (also valuation) make the odds in favour; ADD

We recognise that turning structurally positive on Colgate requires multiple factors to improve. With a not-so-favourable narrative of (1) high category penetration, (2) marginal presence in naturals and (3) no visible improvement in consumer habit of twice brushing, the stock performance has mostly been modest (underperformance vs Nifty in all time frames – 1, 2, 3, 5, 10 year).

That said, we reckon Colgate (stock) fundamentals (and narrative) may potentially improve over 12-24 months. Firstly, any likely deceleration in growth of naturals segment within toothpaste removes an important growth headwind for Colgate. Two, the simple template of new CEO driving stock performance is yet to play out. Three, the work on new categories may finally be unveiled (Ram Raghavan indicated there is 6-9 months’ delay due to Covid). Lastly, Colgate is finally thinking like a category leader and looking to expand the market.

Two plausible outcomes of the above – (1) some indications of improving fundamentals leading to stock performance and (2) the stock providing roll-over returns. We like the probability of the first outcome amidst low expectations.

Consensus (including us) has three expectations from CLGT – (1) diversify in other home and personal care categories, (2) play the role of a category leader and drive (a) category usage (per capita consumption) and (b) category expansion through new sub-segments and (3) drive growth in natural segment. ADD.

Template of ‘new CEO’ optimism not to be missed: As highlighted in our note (link), we believe new CEOs are positive for stock returns. With Ram Raghavan moving to the global entity and Prabha Narasimhan joining as the new CEO (from September 1, 2022), some of that optimism should be applicable in this case also.

Expansion in new categories underway: We believe Colgate (India) has aspirations (a long-drawn one) to expand in the non-oral care categories and this (aspiration) is also driven by the parent entity. Under Ram Raghavan, the process to build a Palmolive portfolio was already underway. Ram recently highlighted (link) that the initiative (to build a Palmolive portfolio) was 6-9 months behind the schedule (versus where they wanted it to be) due to Covid.

We note that Colgate (US) gets 44% of its revenue from Oral Care followed by Personal Care (20%), Pet Care (19%) and Home Care (17%). Besides Palmolive, it has popular brands like Soaftsoap, Irish Spring, Ajax, Axion and Hill’s in its portfolio.

Naturals category share gains to be limited from here: In our opinion, naturals segment is ~32% of the toothpaste market. Colgate’s market share loss over the last many quarters was mainly because of its weak presence in the fast-growing segment of the (highly-penetrated) category. We believe that even if the naturals segment has to gain some share from here, the pace may be a lot slower. Also, Colgate is trying to strengthen its presence in the naturals segment – though, the confidence on a (material) success is low.

Launch of new products within oral care: As a true category leader, Colgate is looking to expand the overall oral care category through specialised products. As part of this strategy, it is looking to expand the kids range and continues to innovate with some category-first innovations (diabetic toothpaste, whitening toothpaste, etc.)

Investments to drive growth on cards: Barring recent raw material pressure, Colgate has delivered healthy margin expansion (both at the gross and EBITDA level). It had indicated the priority to maintain the current margins as it provides good headroom to invest behind its brands and innovations.

Valuations and risks: Our earnings estimates are unchanged; modelling revenue / EBITDA / PAT CAGR of 9 / 11 / 11 (%) over FY22-24E. Maintain ADD with a DCF-based revised target price of Rs 1,800 (Rs1,550 earlier). Key downside risk is lower-than-expected market share gains.

To Read Complete Report & Disclaimer Click Here

For More ICICI Securities Disclaimer https://www.icicisecurities.com/AboutUs.aspx?About=7

Above views are of the author and not of the website kindly read disclaimer