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Favourable RM costs; elevated margins to sustain…

About the stock: Colgate-Palmolive (India) 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. Recently, it launched toothpaste for diabetics, Colgate Vedshakti Oil Pulling & Vedshakti mouth spray.

* Colgate has a 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 & new launches

Q1FY22 Results: Colgate reported strong operating numbers in Q1FY22 results.

* Sales were up 12% YoY, supported by low base quarter

* EBITDA was at | 355.2 crore, up 15.3% YoY, with margins at 30.5%

* Consequent PAT was at | 233.2 crore (up 17.7% YoY)

What should investors do?

Colgate’s share price has given a return of 78% in the last five years (from | 960 in July 2016 to 1707 in July 2021)

* We roll over FY24 numbers with strong growth prospects in natural toothpaste category

* We continue to maintain our BUY rating on the stock

Target Price and Valuation: We value the stock at | 2000, valuing the business at 42x FY24 earnings.

Key triggers for future price performance:

* Naturals toothpaste brand Colgate Vedshakti to drive volume growth

* With favourable raw material prices, the company would be able to maintain elevated operating margins above 30%

* High gross margins give it a leeway to support new launches in oral care as well as personal care category with high (13% of sales) marketing spends

Alternate Stock Idea: We like Zydus Wellness in our FMCG coverage

* It is growing at a steady pace in nascent categories with a 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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