MOSL: COLGATE (Buy)-Healthy volume growth-Operating margins above expectations
- Colgate: Healthy volume growth; Operating margins above expectations
- (CLGT IN, Mkt Cap USD5.1b, CMP INR1322, TP INR1540, 16% Upside, Buy)
- CLGT posted healthy volume growth of 7% YoY (est. 4% growth) in 3QFY19. Net sales came in line growing 6.4% YoY to INR11b (est. INR11b). EBITDA was up 11.2% YoY to INR3.1b (est. INR2.9b), while Adj. PAT grew 12.6% YoY to INR1.9b (est. INR1.8b).
- Market share for toothpaste and toothbrush category was reported in the quarterly results this time around.
- Gross margin saw slight contraction of 10bp YoY to 65.1% (est. 64.7%). Lower operating costs – staff costs down 80bp YoY as % of sales, other expenses down 30bp YoY and ad spends down 20bp YoY – meant that EBITDA margin expanded 120bp YoY to 28.6%. Absolute ad spends were up 4.4% YoY to INR1.26b (INR4.1b for 9MFY19; up 6.6% YoY).
- 9MFY19 performance: Sales, EBITDA and Adj. PAT grew 6.9% (~6% toothpaste volume growth on YTD basis), 14.8% and 14.6%, respectively. EBITDA margin expanded 190bp YoY to 28%.
- Valuation and View: Results were better-than-expectations leading to 4.1%/3.1%/0.9% upward change in FY19/FY20/FY21 EPS. Factors in Colgate’s favor over the medium term are: (a) while the company has not shared market share, the hemorrhage seems to be abating based on the gradual uptrend in volume growth; (b) apparent increased traction in herbal, other new launches and ad spend; (c) its higher market share at ~60% in rural India with rural contributing to over 40% of its sales, making it a promising play on rural recovery, and (d) Irrelatively less expensive valuations of 41.2x FY20 EPS, 5% discount to our ex-cigarette and alcohol consumer peer valuations. With return ratios superior to all peers, barring HUL, and which are likely to improve on better utilization of expanded capacity, such discount is unwarranted when execution starts improving. Valuing the company at 43x December’20 EPS (5% premium 3-year and 5-year average multiple), we get a target price of INR 1,540. 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.
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