Colgate Palmolive - Healthy & Shining
12/30/2011 4:06 PM Friday
In these turbulent times, it is a prudent strategy to stick to market leaders and consistent performers. One company which combines both these traits is Colgate Palmolive (India), which has been a dominant player in the oral care segment and a consistent performer on the financial front too. With its strong brand positioning and highly penetrative rural reach, Colgate has not only managed to stay way ahead of its competitors, but has also posted consistent volume growth. This is clearly seen from the fact that in the past 13 quarters, it has sustained YoY growth of more than 10 per cent. In the current economic environment, we believe that companies like Colgate, with a focus on domestic consumption, have better growth visibility due to their market leadership that is driven by strong brand equity.
The strength in the counter can be seen from the fact that while the Sensex is down 22 per cent on a YTD basis, Colgate is up 19 per cent. There are also other compelling factors for recommending Colgate. First is the company’s zero debt, which is the strongest point in its favour in the current scenario of rising rates. Secondly, its increasing market share in recently-launched product categories like mouthwash is expected to drive growth. Further, the strong MNC management bandwidth and its plans of launching some new products from the parent kitty are also expected give wings to its momentum. On the valuations front, the scrip is trading at 34x its trailing four-quarter earnings. While this may appear to be on the higher side, it is obviously not that bad considering that consistency is highly regarded on the bourses.
Colgate is India’s largest company in the oral care business. It is a market leader in the Rs 3500 crore toothpaste market, with a 52.6 per cent volumes share and a 36.3 per cent market share in the Rs 120 crore toothbrush market. The best part is its strong brand equity and the amazing penetrative reach that the company enjoys, particularly in the rural areas. Its product, Colgate Dental Cream, is the largest distributed in its category in the Indian toothpaste market, with more than 41 lakh outlets selling it. The management has been quite confident about the sustained growth in these two segments, which contribute around 96 per cent of its revenues.
Going ahead, its focus will be on building strength in the value-added toothpaste segment (Sensitive Pro-Relief), where realisations are 2-5x that of the regular segment. Moreover, the mouthwash launches have been showing a good pace of growth, enabling the company to gather 26.4 per cent market share in the Rs 100 crore market for this product, which is growing at 35 per cent every year. Meanwhile, competition from P&G (Oral B) is expected. Though, we feel that due to the unorganised nature of the retail sector, the new entrants in the oral care business will only be able to snatch some market share from the existing local brands, and not from a market leader like Colgate.
On the financial front, the company’s performance has been good. Its topline for H1 FY12 stood at Rs 1304.91 crore and the bottomline was at Rs 200.12 crore, as against Rs 1119 crore and Rs 222.28 crore respectively during the corresponding year-ago period. One may see some margin erosion, but this has been on account of a one-off item of Rs 8.22 crore and higher advertising expenses for new products. Further, the tax exemptions at Baddi have been reduced to 30 per cent from the earlier level of 100 per cent, which has also created some strain.
The company’s steady performance and strong leadership position gives us confidence about the its long-term growth prospects. With consistent volume growth and sustained margins, we recommend the scrip at its current levels with a target price of Rs 1150.
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