26 November 2019
TP: INR1,815 (+22%)
Poised for strong earnings growth over medium term
Inexpensive valuations bolster upside potential
Equity Shares (m)
52-Week Range (INR)
1, 6, 12 Rel. Per (%)
12M Avg Val (INR M)
Free float (%)
404.8 / 5.7
1641 / 1096
Financials Snapshot (INR b)
2019 2020E 2021E
Adj. EPS (INR)
EPS Gr. (%)
Shareholding pattern (%)
Sep-19 Jun-19 Sep-18
FII Includes depository receipts
Stock Performance (1-year)
Sensex - Rebased
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
No material capex required until Dec’22.
post the corporate tax cut, we had included Colgate (CLGT) among
our top picks. In another
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
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.
Krishnan Sambamoorthy – Research analyst
(Krishnan.Sambamoorthy@MotilalOswal.com); +91 22 6129 1545
Research analyst: Dhairya Dhruv
(Dhairya.Dhruv@motilaloswal.com); +91 22 6129 1547 |
(Pooja.Doshi@MotilalOswal.com); +91 22 5036 2689
Investors are advised to refer through important disclosures made at the last page of the Research Report.
Motilal Oswal research is available on www.motilaloswal.com/Institutional-Equities, Bloomberg, Thomson Reuters, Factset and S&P Capital.