Express Idea: Colgate – BUY

India Infoline Research Team | Mumbai | February 25, 2015 15:54 IST

Colgate continues to dominate the oral care industry with strong 50%+ market share despite increased competition in the oral care space.

CMP Rs1,970, Target Rs2,170, Upside 10.1% 
  • Strong market share gains in toothpaste segment
  • Low penetration levels offer opportunity to grow further
  • Dominant position in the oral care industry… Recommend BUY
Strong market share gains in toothpaste segment
Colgate continues to dominate the oral care industry with strong 50%+ market share despite increased competition in the oral care space. Colgate has developed significant entry barriers by means of distribution (5mn+ outlets) and branding efforts. It has successfully driven both penetration and premiumisation in the Indian markets, leading to consistent gross margin gains and 600bps+ increase in toothpaste market share at ~56% since 2008. It has aggressively marketed products like Colgate Sensitive, Colgate Pro-Relief and Colgate Total where prices are 2-5x that of the base Colgate Dental Cream. Premium products now contribute ~10% to sales compared to negligible numbers a few years ago. We believe the premiumisation focus will help Colgate improve margins as these products gain scale.
 
Low penetration levels offer opportunity to grow further
Indian oral care industry is highly under-penetrated especially in the rural markets. Companies are using these low penetration levels as an opportunity to grow the market. The per capita consumption (PCC) level in India is very low at 137gms/year compared to 277gms in China and 561gms in USA. In rural India PCC is ~1/3rd that of urban India. We believe increasing rural penetration, shift in demand from toothpowder to toothpaste and rising urban PCC levels will continue to drive volume growth for the toothpaste category. Being the market leader, Colgate is expected to benefit most (economy brand ‘Cibaca’ has strong presence in the rural markets).
 
Dominant position in the oral care industry… Recommend BUY
With its robust brand equity, innovative launches and products across price-points, Colgate continues to dominate the industry. The entry of P&G has not affected Colgate in a significant manner so far. We expect Colgate to increase its focus on the personal care (Palmolive) and household care (Axion) segments which will further drive growth. The mouthwash category (Colgate Plax) which is nascent is also expected to develop over the longer term and add to profits. We expect Colgate to witness ~12%/23% revenue/PAT CAGR over FY15-17, driven by healthy volume growth and price/mix gains. Recommend Buy.
 
Financial summary
Y/e 31 Mar (Rs m) FY14 FY15E FY16E FY17E
Revenues 35,449 39,449 44,099 49,757
yoy growth (%) 14.9 11.3 11.8 12.8
Operating profit 6,640 8,216 10,890 13,018
OPM (%) 18.7 20.8 24.7 26.2
Pre-exceptional PAT 4,755 5,704 7,156 8,564
Reported PAT 5,461 5,704 7,156 8,564
yoy growth (%) 9.9 4.4 25.5 19.7
EPS (Rs) 35.0 41.9 52.6 63.0
P/E (x) 56.3 47.0 37.4 31.3
Price/Book (x) 44.7 37.0 30.3 25.0
EV/EBITDA (x) 39.9 32.2 24.2 20.2
RoE (%) 87.3 86.1 89.0 87.6
RoCE (%) 121.8 118.8 130.9 128.8
Source: Company, India Infoline Research
 

***Note: This is a NSE Chart

 

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