Hold Colgate; target of Rs 1170: JM Financial

JM Financial's research report on Colgate

Colgate’s volume performance remained tepid due to the carry-over impact of GST transition issues which adversely impacted demand from the Wholesale trade at the start of the quarter. On an intrinsic basis, sales grew 2.8% as 0.9% decline in volumes was more than offset by 3.8% growth in net realisation, which represents the benefit of carry-over pricing, even though some part of it was passed on to offset the cut in tax-rates under GST. As per management, the 8-9% reduction in selling prices post GST has been well received but benefit of the same on growth is likely to be seen only with some lag once the pipeline of higher-priced inventory in the trade is cleared. In the interim, Colgate seems to have had another c.100bps of market share erosion in toothpaste between Apr’17 and Aug’17, as per our workings - likely due to its relatively higher exposure to the rural wholesale trade which has not yet recovered completely. Gross margin expansion and lower advertisement spends (down 6.8% YoY) drove a healthy 9.4% growth in EBITDA.

Outlook

We see limited upside on the stock given weak business momentum and rich valuation of c.42x NTM earnings.