MOSL: COLGATE (Buy)-Volumes miss, but performance better than peers due to high rural salience
​Colgate: Volumes miss, but performance better than peers due to high rural salience
(CLGT IN, Mkt Cap USD4.6b, CMP INR1083, TP INR1285, 19% Upside, Buy)
- Colgate (CLGT) posted volumes decline of 5% YoY (est. of flat volumes). Realization was lower than expected, possibly because of mix, and thus, sales declined by 3.6% (est. of +7%) to INR9.7b in 1QFY18. EBITDA rose 5.0% YoY (est. of +12.9%) to INR2.2b. PAT grew 8.5% YoY (est. of +15.8%) to INR1.4b. CLGT passed on the benefits of lower GST rates July onward by reducing MRP by 8-9% under its key categories of Toothpaste and Toothbrush.
- Market share in Toothpaste/Toothbrush declined 160bp/180bp YoY to 54.3%/45% in 1QFY18. High rural salience (40%) compared to peers would have been a factor.
- Gross margin continued its uptrend (+100bp YoY to 63.0%; est. of flat margin). Lower adspend (-70bp YoY to 14.7%) and other expenses (-20bp YoY to 18.6%) were slightly offset by a 10bp increase in staff cost to 7.4%. Thus, EBITDA margin expanded 180bp YoY to 22.7% (est. of 22.0%).
- Valuation and view: Oral care category has high growth potential, and CLGT has strong moats in the form of distribution, category development efforts, brand strength, R&D and advantages of its concentrated focus on oral care. It also has a remarkable track record in warding off competition because of these moats. New campaigns focusing on enhancing brushing habits (twice a day) from current abysmally low numbers, as well as likely enhanced herbal focus, also boost prospects. Long-term earnings growth potential is strong and balance sheet is best-of-breed. CLGT will also be a significant beneficiary of rural revival, given its disproportionately high rural market share v/s urban. We maintain Buy with a revised target price of INR1,285 (INR1,335 earlier) based on 41x June 2018E EPS, in line with average multiple for the past three years.
Colgate Palmolive (India) Limited is engaged in the personal care and oral care business. The Company offers various personal care products, such as soaps, cosmetics and toilet preparations. The Company's oral care category of products includes toothpastes, toothbrushes, toothpowder, whitening products and mouthwash. In the toothpaste category, the Company offers products, including Colgate Total Charcoal Deep Clean Toothpaste, Colgate Active Salt Neem Toothpaste and Colgate Sensitive Pro-Relief (CSPR) Enamel Repair Toothpaste. In the toothbrush category, the Company offers the Colgate 360 degree Toothbrush range, including 360 degree Charcoal Gold, 360 degree Whole Mouth Clean, 360 degree Visible White and 360 degree Floss-Tip, and Colgate ZigZag Black Toothbrush. In the Personal Care category, the Company offers Palmolive's Foaming Hand Wash range in approximately two variants.
Motilal Oswal Financial Services Ltd. is a reputed name in Financial Services and Online Trading with group companies providing services such as Private Wealth Management, Retail Broking and Distribution, Institutional Broking, Asset Management, Investment Banking, Private Equity, Commodity Broking, Currency Broking, Principal Strategies & Home Finance.
Motilal Oswal Securities is a group company of Motilal Oswal Financial Service Limited which started as a stock trading company and has blossomed into well diversified firm offering a range of financial products and services. Motilal Oswal has built a reputation as the source for best stock trading company and this has taken a wealth of experience, knowledge and expertise, constantly working in tandem, over the years.
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