For Colgate (CLGT), FY3/17 was a sluggish year with total income and NP growing 2.9% and –1%, respectively, and volumes sliding by 2% YoY. The lackluster show was largely on account of drop in market share in the toothpaste category due to consumer shift towards nature-based offerings leading to market share gains for Patanjali (unlisted) and Dabur (DABUR IN) as well as the impact of demonetization hitting rural India. However, given CLGT’s robust brand strength, innovation ability and capacity to invest in high advertising & promotion (A&P), FY3/18 should see market share stabilize in the toothpaste category. This would be driven by strong consumer response to its nature-based offering Cibaca Vedshakti and new product launches around natural/Ayurveda platform. We estimate average volume growth of 7.5% over FY3/18–19 led by market share gains and low base. Additionally, recent aggressive price increases across its portfolio, premiumization and operating leverage should aid gross margin and EBITDA margin improvement of 190bps and 230bps over FY3/18–19. We build in revenue and NP CAGR of 15% and 20.4% over FY3/18–19. Maintain BUY.
Launches in Natural Segment to Drive Volume Growth Summary: For Colgate (CLGT), FY3/17 was a sluggish year with total income and NP growing 2.9% and –1%, respectively, and volumes sliding by 2% YoY. The lackluster show was largely on account of drop in market share in the toothpaste category due to consumer shift towards nature-based offerings leading to market share gains for Patanjali (unlisted) and Dabur (DABUR IN) as well as the impact of demonetization hitting rural India. However, given CLGT’s robust brand strength, innovation ability and capacity to invest in high advertising & promotion (A&P), FY3/18 should see market share stabilize in the toothpaste category. This would be driven by strong consumer response to its nature-based offering Cibaca Vedshakti and new product launches around natural/Ayurveda platform. We estimate average volume growth of 7.5% over FY3/18– 19 led by market share gains and low base. Additionally, recent aggressive price increases across its portfolio, premiumization and operating leverage should aid gross margin and EBITDA margin improvement of 190bps and 230bps over FY3/18–19. We build in revenue and NP CAGR of 15% and 20.4% over FY3/18–19. Maintain BUY. Target Price and Catalyst: Our target price of Rs1,170 is based on a PER of 38x our FY3/19 EPS estimate of Rs30.8. Key catalyst would be improvement in volume growth backed by market share gains and expansion in margins driven by positive operating leverage.
Earnings: With a low base in FY3/17, management’s renewed focus on regaining its lost market share through more new product launches especially around the natural/Ayurveda platform and high marketing spend, we anticipate a recovery in sales volumes. We forecast a recovery in volume growth to an average 7.5% over FY3/18–19. Additionally, with recent price hikes being more than inflation in raw material prices, we estimate revenue CAGR of around 15% over FY3/18–19. We forecast EBITDA margin rising from 23.7% in FY3/17 to 26% in FY3/19. CLGT’s NP CAGR over FY3/18–19 should be 20.4% up from the low of 1.6% CAGR over FY3/16–17. Valuation: We maintain our BUY rating on CLGT with a target price of Rs1,170, valued at 38x in-line with its 5-year historical average applied to our FY3/19 earnings. Our forecasts are 2.3–6.5% higher than Bloomberg consensus estimates over FY3/18–19. The main risks to our recommendation and target price are 1) increased competitive intensity in natural segment of toothpastes leading to lower market share gains for CLGT than we currently estimate, 2) above-expected increase in raw material prices and A&P spends making our margin estimates appear optimistic and 3) destocking of products across trade channels on account of goods and services tax (GST) implementation in FY3/18 could lead to lower volume growth than we currently estimate.
Source : www.htisec.com
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