Buy Colgate-Palmolive (India): target of Rs 1700: ICICI Direct

ICICI Direct's research report on Colgate-Palmolive (India)

Colgate reported strong set of numbers with 5.3% revenue growth led by 7.1% domestic business growth. The impact of Covid induced lockdown was minimal in oral care category given inventory levels at trade as well as at consumer were sufficient to cover one month supply disruption. Given manufacturing & supply chain issues were resolved by April, the companies were able to ramp up manufacturing in short period of time. We believe Colgate has recouped first quarter’s lost sales in Q2FY21. All categories -toothpaste, toothbrush & personal care witnessed healthy demand conditions. The company launched variant of Colgate visible while toothpaste & new Colgate gentle line of toothbrush. It has also launched a Colgate Vedshakti Mouth spray during the quarter. With a sharp decline in crude based commodity cost, gross margins improved 340 bps. Further, the company got the benefit of lower advertisement rates which resulted in 160 bps lower ad-spend to sales. Moreover, cost cutting measures resulted in overhead spends down by 120 bps to sales. All these factors resulted in operating margin expansion of 540 bps to 31.8%. Net profit increased by 12.3% to Rs 274.2 crore despite the lower tax in base quarter.

Outlook

The growth opportunity in oral care space is limited given high penetration and slow rate of habit change (brushing twice a day). However, Colgate has been able to improve margins on a continuous basis with periodic favourable conditions. We expect similar conditions would drive earnings growth (8% CAGR in FY20-23E). The dividend payout has considerably increased in last few years. With Rs 34/share dividend declared in H1FY21, we expect Rs 40/share pay-out for the full year (~3% dividend yield). We upgrade our rating from HOLD to BUY with the revised target price of Rs 1700 /share.