Buy Colgate Palmolive; target Rs 1425: Emkay

Emkay Global Financial Services is bullish on Colgate Palmolive (India) and has recommended buy rating on the stock with a target price of Rs 1,425 in its March 22, 2013 research report.

"Colgate Palmolive (India), oral care consumption growth of 7% p.a. CAGR is buoyed by noteworthy changes in consumption pattern, which are structural in nature. Rising awareness about oral care and income effect has influenced consumption patterns. Consumers are adding needbased toothpastes, mouthwash and dental floss in oral care consumption. The category is demonstrating premiumisation, which is among the strongest in FMCG space. These are building blocks for price inelasticity of the category.

Colgate is best placed in the oral care category
Colgate is category leader with 53% market share, which is purely a function of its strong brand salience, robust distribution network, rich product portfolio, innovations pipeline, creation of sub categories & extensions. We have modeled for 5% price led growth in ensuing years. The volume growth forecasts are 8-9% for FY14/FY15E, 300 bps lower than average run-rate to factor slow down in consumption spends.

Threat of competition remains exaggerated
Colgate is undisputed leader in oral care category, both locally and globally. Colgate has gained market share (global) and emerged stronger with P&G’s initiatives impacting No2 & No3 player (relevant countries). P&G’s entry in India (hypothetically) would impact Colgate’s market share by 90 bps p.a. and scale down revenue growth by 1%. These calculations are based on assumption that P&G would play in mid-level and premium toothpaste market with differentiated offerings. Thus, P&G’s threat is a case of exaggeration & most likely to remain a perceived threat against proven threat.

Colgate in top quartile of FMCG universe
Colgate is in top quartile of Emkay’s FMCG universe with (1) earnings growth expectations of 14% & 15% for FY14/15E equal to sector aggregates and (2) highest ROE’s in FMCG universe at 99% for FY14E. Colgate discounts FY15E earnings at 25X, approximately 30% higher than its average valuations. Considering benign competition and category heading towards price inelasticity; premium valuations to sustain. We maintain BUY with price target of Rs 1425," says Emkay Global Financial Services research report.

Bodies Corporate holding more than 50% in Indian cos

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