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Moderating growth
Colgate-Palmolive India (Colgate) has not only
maintained its leadership position in all oral healthcare
segments it operates in, but also increased its market
share over the years by leveraging its comprehensive
product profile across various price points. However,
going forward, we see a significant slowdown in
earnings (7.5% earnings CAGR over FY10-13E vs 38%
over FY07-10). Historically, the company has benefited
from the increased penetration of oral healthcare
products. This coupled with consistent gain in market
share helped it clock high double-digit volume growth.
With high cost inflation, increased competitive intensity
and higher tax rates, we believe the positives have been
priced-in and the stock is fairly-valued. We initiate
coverage with a HOLD rating.
Strong market leadership: Colgate has not only
maintained consistent leadership in all the three categories
in the oral healthcare segment (toothbrush, toothpaste and
toothpowder), but also increased its market share over
time. The variety of product offerings across price points
helps it service all possible market segments and also gives
it an edge over competitors.
Expected competition to increase A&P spends: On the
back of increasing competition from HUL, Dabur and the
much awaited launch by P&G, the likelihood of aggressive
promotions and brand spends is high. With moderating
volume growth, Colgate would be compelled to increase its
advertising and promotion (A&P) expenses, which are
already the highest in the industry.
Growth to moderate: Colgate is expected to post steady
15% revenue CAGR over FY10-13E. EBIDTA growth would
moderate to 14.4% over the same period from 41% in
FY07-10. Increased tax rates would result in PAT registering
mere 7.5% CAGR over the forecasted period.
Strong return ratios, high dividend payout: We expect
the company to post the best return ratios in the industry
with RoCE at 124% and RoE at 112% in FY13E. We also
expect it to steadily increase dividend payout ratio from
64% in FY10 to 77% in FY13E.
Valuations: The stock is currently trading at 26.1x FY12E
and 23.2x FY13E EPS of Rs38.9. We value the stock at 22x
FY13E EPS, the upper-end of its long term average 1 year
forward PE band and arrive at a target price of Rs857, 6%
downside from current levels and initiate coverage with a
Hold rating on the stock.
Key Upside Risks: (i) Higher-than-expected volume
growth; (ii) Lower A&P spend; and (iii) Expansion of
capacities in tax benefit locations.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Moderating growth
Colgate-Palmolive India (Colgate) has not only
maintained its leadership position in all oral healthcare
segments it operates in, but also increased its market
share over the years by leveraging its comprehensive
product profile across various price points. However,
going forward, we see a significant slowdown in
earnings (7.5% earnings CAGR over FY10-13E vs 38%
over FY07-10). Historically, the company has benefited
from the increased penetration of oral healthcare
products. This coupled with consistent gain in market
share helped it clock high double-digit volume growth.
With high cost inflation, increased competitive intensity
and higher tax rates, we believe the positives have been
priced-in and the stock is fairly-valued. We initiate
coverage with a HOLD rating.
Strong market leadership: Colgate has not only
maintained consistent leadership in all the three categories
in the oral healthcare segment (toothbrush, toothpaste and
toothpowder), but also increased its market share over
time. The variety of product offerings across price points
helps it service all possible market segments and also gives
it an edge over competitors.
Expected competition to increase A&P spends: On the
back of increasing competition from HUL, Dabur and the
much awaited launch by P&G, the likelihood of aggressive
promotions and brand spends is high. With moderating
volume growth, Colgate would be compelled to increase its
advertising and promotion (A&P) expenses, which are
already the highest in the industry.
Growth to moderate: Colgate is expected to post steady
15% revenue CAGR over FY10-13E. EBIDTA growth would
moderate to 14.4% over the same period from 41% in
FY07-10. Increased tax rates would result in PAT registering
mere 7.5% CAGR over the forecasted period.
Strong return ratios, high dividend payout: We expect
the company to post the best return ratios in the industry
with RoCE at 124% and RoE at 112% in FY13E. We also
expect it to steadily increase dividend payout ratio from
64% in FY10 to 77% in FY13E.
Valuations: The stock is currently trading at 26.1x FY12E
and 23.2x FY13E EPS of Rs38.9. We value the stock at 22x
FY13E EPS, the upper-end of its long term average 1 year
forward PE band and arrive at a target price of Rs857, 6%
downside from current levels and initiate coverage with a
Hold rating on the stock.
Key Upside Risks: (i) Higher-than-expected volume
growth; (ii) Lower A&P spend; and (iii) Expansion of
capacities in tax benefit locations.
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