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Colgate Palmolive: Weak macros, competition from HUL key overhang on stock

The stock has slipped 4 per cent in the past three trading sessions
Despite a decent September quarter (Q2FY21) result, Street gave thumbs down to Colgate Palmolive (India). Shares of the company slipped around 1 per cent to Rs 1,415 apiece on the BSE on Thursday. With today’s loss, the stock has slipped 4 per cent in the past three trading sessions, BSE data show.

For the quarter ending September 30, 2020, the company posted a 12.3 per cent jump in consolidated net profit at Rs 274.2 crore, as against Rs 244.1 crore profit reported in the year-ago quarter. The revenue, meanwhile, was up 5.2 per cent at Rs 1,286 crore, as against Rs 1,222 crore in the year-ago period.

That apart, EBITDA (earnings before interest, tax, depreciation, and amortisation) grew 26.7 per cent YoY to Rs 4,100 crore, as against analysts' expectation of Rs 340 crore in the recently concluded quarter.. Higher staff costs as % of sales (up 80bp YoY) were offset by lower other expenses (down 120bp YoY) and lower ad-spends (down 160bp YoY), helping EBITDA margins to expand by 540bp YoY to highest-ever margins of 31.8 per cent. Gross margin expanded 340bp YoY to 68.1 per cent.

The numbers, however, are not encouraging enough, say analysts, who believe that the company needs to "adopt more aggressive strategy to accelerate growth in non- oral care segments like Handwash, Sanitizers, Body wash, Bath Soaps and Shampoos" to be able to compete with firms like Hindustan Unilever, Dabur, and Patanjali.

Analysts at Phillip Capital, for instance, remain sceptical on Colgate’s "stability of market share thesis" and believe that ad spends are expected to remain at elevated levels for next few quarters to back new launches /re-launches.

"In our view, Colgate has all the ingredients of "Essentials Play" in its favour; however increased competitive intensity and slowing category growth are key challenges that management need to tackle for a meaningful recovery. Moreover, recent integration of GSK Consumer with HUL (gives access to GSK's premium brands of toothpaste in chemist channel), will further make premiumization journey for Colgate that much difficult and enhance cross-selling opportunities," the brokerage said in a post-result report.

The brokerage has ‘Sell’ rating on the stock, with a target price of Rs 1,175, as it remains in wait and watch mode and would like to see initial results of new strategy coming through as incumbents (HUL/ Patanjali and Dabur) have enough firepower to deal any eventuality and likely to put best foot forward to defend their turf.

Prabhudas Lilladher, although acknowledges ColPal’s effort to gain market share by sustained innovations (launched Colgate Visible White Instant and Colgate Vedshakti Mouth spray); brand building by Ad spends; and ensuring shelf availability, believes that the company’s margin contraction would remain elevated due to higher ad spends in the near-term.

"We maintain our earnings estimates and believe growth has been lower than peers like HUVR (over 10 per cent YoY in Q2). Also, volume growth for CLGT remains cause for concern (2 per cent CAGR over FY15-20) and pricing CAGR has been at 3 per cent. We expect a sales CAGR of 4 per cent in the medium term, for which volume will recover (flat in FY20 & FY21E) as pricing-related growth annualize in FY22. We reiterate Reduce with a TP of Rs 1,358 based on 40x FY22E EPS of Rs 34," said analysts at Elara Capital.

ICICI Securities, meanwhile, believes Colgate benefited from a largely ‘essential’ portfolio, presence across the price-benefit pyramid – help capture any impact of downtrading, and strong distribution reach, especially in rural India which was relatively less impacted. Weak macros, however, are likely to impact premiumisation and delay the likely business plan to diversify in other home and personal care categories, it says. The brokerage, too, has ‘Hold’ rating on the stock with a target price of Rs 1,500.

That said, analysts at Motilal Oswal Financial Services believe that Colgate Palmolive remains a good investment bet given the nature of the category (98 per cent of sales from oral care) offers less uncertainty currently,  it has best-of-breed balance sheet,  valuations are moderate at 38x FY22E EPS, close to its 10-year average, and there is a spark of an incipient market share recovery under the new Managing Director. The brokerage has ‘Buy’ call on the stock with a target price of Rs 1,720.

"Good pickup in domestic revenues post two quarters of weakness is encouraging and we expect toothbrush and exports business to recover gradually. CLGT is looking to step up the game on media intensity and push its strategic agenda of market share gains, with the environment becoming more conducive. Stronger gross margin profile (RM intensity likely to be benign) will continue to provide ammunition for A&P investments.. We do note that CLGT has not yet turned the corner on market share trajectory. CLGT’s toothpaste market share has stabilized in our view but the company isn’t gaining share yet," said a report by Kotak Institutional Equities. Their DCF-based revised fair value stands at Rs 1,600/share from Rs 1,550 earlier.


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