Hold Colgate-Palmolive; target of Rs 1115: ICICI Direct

ICICI Direct's research report on Colgate-Palmolive

Colgate-Palmolive posted healthy results in Q2 with the 2.8% growth in sales despite ~9% cut in prices in July. The price cut came in the wake of passing on of GST benefit to consumers. The company reported a 150 bps improvements in margins with the controlled spend towards advertisement in a volatile trade environment. With the higher tax outgo, net profit declined 2.1% YoY to Rs 177.6 crore With the disruption at the wholesale network due to transition to GST, CPIL witnessed ~1% YoY decline in volumes. However, we believe this disruption in trade would settle in the second half of FY18 and expect strong volume growth with aggressive price cut ahead of competition, new launches in natural portfolio & low base of Q3 due to demonetisation impact in corresponding period Colgate maintained its leadership position with 54.0% and 45.5% market share in toothpaste and toothbrush categories, respectively. However, it marginally (30 bps decline in market share during January-August 2017) lost market share in toothpaste segment.

Outlook

Though we remain positive on CPIL’s constant innovation & aggressive brand building, we would wait for these to result in growth. We expect a CAGR of 7.7% and 14.7% in revenue & earnings, respectively, in FY17-19E. On account of benign RM prices, lower tax incidence & supply chain benefit of GST, we expect EBITDA margin to inch up at 22.9% by FY19E. We reiterate our HOLD rating with a target price of Rs 1115/share.