Kotak Securities' report on Colgate Palmolive (India)
"Colgate (India) reported revenues ahead of our estimates, and profits marginally lower than estimates. The company has continued to deliver on market share gains. However, market growth continues to be soft in oral care. Colgate shall be, 4QFY15 onwards, facing a stronger base on margins, which we believe shall lead to corrections in earnings expectations and valuations, going forward. We maintain SELL on Colgate, with a price target of Rs 1874."
Outlook and Investment View
The company has continued to enjoy the low base of prior quarters, in which Colgate had expanded advertising and sales promotion spends significantly to fend off rivals (at that point, Oral-B), which has led to strong growth in EBITDA.
Going forward, we expect that: a/ volume growth for the industry is likely to be maintained at 5-6% levels in the coming few quarters, b/ the company's gross margins are likely to see further expansion, on raw material benefits, c/ we expect that Colgate shall maintain/ raise its advertising spends (as percentage of sales), utilizing it as an entry barrier, d/over the medium-term, we would expect competitive activity to rise significantly from Unilever and P&G.
We raise our FY16 EPS estimate 3.4% for Colgate on account of lower prices of raw materials.
Following upgrade in estimates, Colgate trades at 41x PER FY16E, in line with the target valuations for HUL.
We believe the re-rating of the stock has been significantly helped by strong EBITDA growth, enabled by weak margin base (high promotion spends in the base quarters). Going forward, we see that Colgate shall be facing a fairly strong base; EBITDA growth shall likely be less impressive in the quarters ahead, especially given the growth that the company has witnessed in employee and other expenses in 2QFY15/3QFY15.
"We see potential for rising competition in the quarters ahead, and continue to think that the stock's valuation leaves no scope for higher competitive intensity. We maintain SELL on Colgate Palmolive India, with a price target of Rs 1874 (revised from Rs Rs 1635)", says Kotak Securities research report.
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