Colgate Palmolive - Armed to the teeth! - IDFC

We met Paul Alton, EVP & CFO, Colgate, for a business update. Key takeaways:

- Sustained business momentum: Colgate's oral care business has not been adversely affected by a 6-7% rise in product prices in the past three quarters and continues to post double digit volume growth.

- Premiumisation is the emerging trend in the oral care business; Colgate's premium portfolio (8-10% of revenues) is growing at over 2x the base business. As oral care is still primarily a mass business (vs other personal care categories with 20%+ premium segment) there is significant scope to premiumise; Colgate stands to benefit most from the trend as it is at the helm of this space.

- Input costs have stabilized after sharply increasing in the past few quarters. With price increases coming into effect and the rupee stabilizing, gross margins should sequentially improve from 58.7% in 1HFY13.

- Competition from incumbents (HUL and Dabur) and new entrants (GSK) notwithstanding, the management believes it can build on its current market share given a wide portfolio, focused communication and continued launches of new variants in oral care.

Dominance in a relatively inelastic category, benefits of premiumisation, and focus on innovation make Colgate one of the more attractive plays in our coverage universe. HUL's higher share of voice has not translated into share of market which is testament to Colgate's strong brand equity.We believe concerns over valuations are overdone as Colgate's multiples (at 30xFY14 EPS) are in line with those of other MNC consumer companies and, given strong business fundamentals vis-a-vis peers, are justified. Moreover, GlaxoSmithKline's recent open offer to buy back shares of its India consumer healthcare business at a 30% premium to CMP indicates that all consumer MNC names will remain highly pegged. Upgrade to Outperformer, with a higher target price of Rs1530 (Rs1237 earlier).

Source : Equity Bulls

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