Buy Colgate; target of Rs 1720: Motilal Oswal

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Motilal Oswal 's research report on Colgate

Colgate (CLGT) reported a beat on all fronts relative to expectations, led by all-time high EBITDA margins. HUVR (the second largest oral care player) disclosed in its 2QFY21 results that it had achieved double-digit sales growth in oral care in the quarter. In view of this, CLGT’s 5% top line growth and likely 4% volume growth in 2QFY21 seems disappointing, even as we await numbers from Dabur, the third largest player in the category. There was a hint of some incipient revival in market share in 4QFY20. Therefore, further loss of share to peers, if true, would be disappointing. We retain Buy on CLGT as (a) management’s efforts over the last 2-3 years on direct distribution expansion, increased ad spends and new launches give hope for revival, (b) rural outlook is getting better and the company could be among the key beneficiaries with 40% rural sales contribution, and (c) its valuations are relatively inexpensive (38x FY22, ~15% discount to peer average) despite superior RoCE.

Outlook

We maintain Buy on CLGT given that (a) the nature of the category (98% of sales from oral care) offers less uncertainty currently, (b) it has best-of-breed balance sheet, (c) valuations are moderate at 38x FY22E EPS, close to its 10-year average, and (d) there is a spark of an incipient market share recovery under the new Managing Director. We arrive at a TP of INR1,720 (target multiple of 40x Sep’22E EPS, close to 5-year average).

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