MOSL: COLGATE (Buy)-Demand moderation temporary; expect recovery soon
COLGATE: Demand moderation temporary; expect recovery soon
(CLGT IN, Mkt Cap USD4.7b, CMP INR1203, TP INR1400, 16% Upside, Buy)
- CLGT's revenue increased 4.2% YoY to INR10.8b (our estimate: INR11.2b). EBITDA grew 6.5% YoY to INR3b (our estimate: INR2.8b). Adj. PAT was up 1.3% YoY to INR1.7b (in-line). Domestic sales grew 6% YoY, led by 4% volume growth (our estimate: +6%).
- Gross margin shrank 10bp YoY to 65.9% (our estimate: 64.8%). Higher staff costs (+50bp YoY) and ad spends (+20bp YoY) were offset by lower other expenses (-130bp YoY), leading to EBITDA margin expansion of 60bp YoY to 27.6% (our estimate: 25%). Absolute ad spends increased just 5.4% YoY.
- CLGT adopted Ind-AS 116 'Leases' using the modified retrospective method, which means that comparatives for FY19 have not been retrospectively adjusted.
- Valuation and view: We lower our growth assumption for FY20 post results, leading to changes to our model. Consequently, there is a minor cut in our FY20/21 EPS estimate. Although CLGT expects a demand recovery in the coming quarters, near-term volume growth is likely to be in mid-single-digits, despite stability attained in market share in the previous quarter. Management's decision to place primacy on volume-led sales growth will likely restrict near-term margin expansion, in our view. However, a few factors are in CLGT's favor from the medium-term perspective - (a) the toothpaste market share hemorrhage appears to have abated after three years, (b) there is evident traction driven by herbal and other launches and (c) valuations are relatively less expensive at ~35x FY21E EPS, ~7% discount to our ex-cigarette and alcohol consumer peer valuations. With return ratios superior to peers (barring HUL) and likely to improve further due to better utilization of expanded capacity, such a discount is unwarranted when execution starts improving. Valuing the company at 40x FY21 EPS, we derive a target price of INR1,400. Maintain Buy.
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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