Colgate Palmolive India - Strong growth but valuation concerns - Antique

Witnessing strong traction in sales

Our channel checks across the five states, indicated to the strong domination of CPIL in oral care. According to our interaction with the trade, CPIL is witnessing accelerated growth in sales backed by its premium portfolio in the urban markets and Cibaca in the rural markets. The company's low unit packs, especially Max fresh gel, is receiving high acceptance in the rural markets. We therefore are increasing our sales growth estimates for the company from about 15% CAGR during the next two years, FY12-FY14e to 18% CAGR.

Strong branding and rural reach to aid volume growth

Backed by its strong distribution and a brand which is synonymous with toothpaste in India, CPIL is well placed to benefit from the urbanisation and rural opportunity. Additionally a growing awareness for personal hygiene would aid its performance in the coming years.

Consistent market share gains reinforces dominance

During the last 5 years, CPIL has reinforced its dominance in the Indian oral care category by increasing its market share from about 49% in FY08 to about 51.3% in FY12 in toothpastes. This could be largely attributed to the increase in market share of Cibaca in the economy segment. Additionally, the company's relatively newer portfolio, comprising of Colgate Max fresh and Colgate Active Salt have gained strength during the last five years in the premium segment and currently command a market share of 5.9% and 4.3% respectively.

Continued dominance in turn has led to more stable ad-spends

The consistent improvement in market share over the years has facilitated a relatively lower and less volatile spend on advertisements during the last four years. The company's ad-spends have been maintained in the range of 15-16% during FY09-FY12. This in turn has aided profitability of the company as in the past, ad-spends have had a high bearing on the company's EBITDA margins.

Valuation

At the CMP of INR1,236, the stock is trading at a PE of 30.4x FY13e and 25.5x FY14e. After witnessing a consistent improvement in toothpastes market share during FY10-FY12, the stock has witnessed a re-rating from an average PE of 21.9x to 26.9x. Post the re-rating during the last three years, the stock's average PE valuation stands at about 24.8x. Though we believe in the company's long term growth potential from the rural dividend, we feel that the current valuations factor in majority of the positives. From its average valuations of 24.8x we dont see any case for a major re-rating from the current levels. We therefore maintain a HOLD on the stock with a target price if INR1,213 (implying a PE of 25.0x).

Source : Equity Bulls

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