Colgate losing share not due to Patanjali only: ICICI Securities

Colgate has been losing its market share little by little. The new entrant, Patanjali, is not the sole reason for this loss, said Anand Mour, Head of Research, ICICI Securities. The slowdown in the rural economy has also been a major factor. But Mour is positive of a bounceback soon. He says the company will witness a volumes growth of 6 percent in FY17. He gives a buy call for the stock.He maintains a buy for ITC at a target of Rs 404, saying it will outperform in FY17. He expects a steady rise in the company's volumes.He also recommended a hold for Asian Paints. Below is the transcript of Anand Mour’s interview with Ekta Batra and Anuj Singhal on CNBC-TV18.Ekta: First wanted to start by asking you about Asian Paints. That stock is at the record high. Do you look at that stock and do you think that there is further upside or valuations are just too rich?A: Structurally, the paints as space is definitely going to gain in the country. But, the valuation comfort is definitely what discomforts our investors for the further add in this space. Last two quarters, if you were to look at the kind of volume growth a whole lot of paint companies have showcased, it is really surprising. So, we are building in about 12-14 percent kind of volume growth even in FY17 for the paint companies. But, we are still not comfortable with the valuations. We have a hold rating on Asian Paints as of now.Anuj: The stock that finally moved was ITC after a long bout of underperformance. Do you see that underperformance ending now for good and do you see the stock headed higher?A: That is one of our top picks in the space. If you were to look at the concerns for the investors on ITC, was hovering around first on the volume. The volume decline in this space over the last 4-6 quarters has been pretty high, unprecedented. The shift from legitimate cigarette industry to contraband was driving that as well as the higher excise hike. That is something for the Q4, we have seen the volume stabilising. So, that part of the concern should be behind. In FY17, we look at the volume growth being there in each of the coming quarters. The second concern which the investors have around ITC was single digit profit before interest and tax (PBIT) growth. Again, Q4 showcased a region of double digit PBIT growth in cigarettes and we believe that FY17 should see, as a whole, double digit PBIT growth in cigarettes. The third concern which investors continue to have is with regards to goods and service tax (GST) and the sin tax where we believe that noises around GST and sin tax will continue to be there till the time it is implemented. But, do not see that much of a concern for ITC and expect that ITC should outperform in FY17.Ekta: The big interesting story obviously is what is happening with Colgate Palmolive. While the street was enthused with the volume growth of around 4 odd percent that it reported yesterday, there is competition in the wings for Colgate. So, what is your estimate for volume growth in FY17 and target price as well?A: Over there, across the board, the staples, we have to look at the fifth peer of Indian fast-moving consumer goods (FMCG) companies, that is Patanjali. Yes, it is after a long time we have seen Colgate losing market share in the space. But, despite that one has to look at that the Q4 is a revival on volume growth. What impacted Colgate, not just Patanjali, but also the overall slowdown. One has to look at that over the last, if one were to look at last decade, Colgate’s volume growth was driven by increase in penetration in the rural areas. That is rural slowdown clearly has impacted that driver of growth for Colgate in FY16 beside the Patanjali impact. So, we believe that Fy17, Colgate should see the volume growth coming back to the 6 percent and that should drive the revenue growth at about 10-10.5 percent over the next two years while the earnings should grow at about 14-15 percent. And we have an add rating on the stock. I believe that that is one of our non-consensus call and at every dip, we will like to add on Colgate, primarily because a revival is visible in Q4. Not many companies have shown the revival in terms of volume growth. So, we do not see many companies reporting revival at least for the next two quarters. So, in that stance, Colgate definitely has shown commendable performance in Q4.