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Colgate India has registered toothpaste-portfolio MRP CAGR of 10-18% over the last three years, except in mass-end Cibaca (~5%), to bridge the product price gap with other global markets. This compares with its muted 2-5% price CAGR over 2013-20. A closer look at the various segments in Toothpaste reveals Colgate is now priced at a premium to most incumbents. Advocated further by its global CEO Noel Wallace, Colgate India will now focus on scientific expertise and technical superiority of offerings, with a view to premiumize the category. The Naturals segment, which forms ~30% of the market, is likely to be a defocus segment for the company. We still see lack of structural growth as a fundamental concern for the stock. Hence, we maintain SELL with Sep-24E TP of Rs1,800/share, on 35x P/E (based on the last 5Y avg. fwd. P/E).

Oral care opportunity muted, need for diversification to drive growth With the toothpaste category’s penetration at ~85% in urban and ~75% in rural, volume growth ahead would be a factor of converting non-users and users into ‘twice-brushing’ users. We see Toothpaste volume CAGR of ~3% over coming 5 years. Fathoming the existing core business set-up, Colgate India is now looking to drive growth via price actions and premiumization. Overall, the strategy ahead is focused on offering sciencebacked and technically-superior products, which would empower the company to effect price hikes. From a structural growth perspective, we see the need for diversification.

Enhanced pricing helps in margin, but may trigger a competitive action In this report, we gauge the pricing behavior of Colgate. Ex-Cibaca, we see Colgate has effected MRP CAGR of 10-18% across the portfolio over the last 3 years as against lowto-mid single-digit CAGR in the previous seven (FY13-20). Also, Company’s price gap with competition is widening; if competition sticks to rational hikes for price parity, Colgate’s strategy would aid sector profitability. But through the competition’s lens, this also makes space for rivals to seize market share. MNC contenders (P&G) may see this as an opportune time to re-enter the category. HUL still looks to re-establish Pepsodent.

Stock riding the new narrative wave; prospects beyond FY24 look grim We see the new CEO’s measures turning around the business, with steady price hikes aiding margin growth. Our bull case scenario reveals this would lead to mid-teen earnings growth, which has already been built-in the stock price up-move. Our deep-dive assesses usage of consumer cohorts in urban & rural markets, and suggests ~3% volume CAGR over the next 5 years. This, along with inflation pass-through, is expected to generate ~6% value growth in the category. We are concerned about growth beyond FY24, when we anticipate a stock de-rating. While our base case implies Sep-24E TP of Rs1,800 (on 35x target P/E), our bull case TP is ~Rs2,300 (40x target P/E), and our bear case TP is Rs1,465 (31x target P/E). The stock’s historical (last 5Y) avg fwd P/E is 39x; retain SELL. 

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