1. Jefferies puts ‘Buy’ on Colgate; PT of Rs 1,102.79

Jefferies puts ‘Buy’ on Colgate; PT of Rs 1,102.79

We remain confident that the market leader would defend the turf, be it in traditional oral care, or naturals category.

By: | Published: March 17, 2017 3:41 AM

We remain confident that the market leader would defend the turf, be it in traditional oral care, or naturals category. Rejuvenated focus on Cibaca Vedshakti would result in market share gains. We tweak our estimates slightly and reiterate Buy on Colgate.

Toothpaste volumes declined by c.12% in Q3FY17 following higher salience on the wholesale channel (c.50% to increase penetration in the rural areas. Channel restocking would fuel volume growth in the short term and we are confident of 7% growth, both in FY18E and FY19E.

While competition is not new to Colgate, we argue that No 2 or No 3 market share companies are more at risk. Rejuvenated focus on Cibaca Vedashakti would put some pressure on gross margins. Brand Colgate’s pricing power and premiumisation in the toothpaste category makes us confident of only 50bps of gross margins compression (FY19E, over FY17E).

Operating leverage would ensure profitable growth and we are confident of 100 bps of margins expansion (FY19E, over FY17E).RoEs declined from 87.3% in FY14 to 54.0% in FY17E due to lower asset turns. Capacity expansion is now complete and we expect the RoEs to improve from these levels (at 60.5% in FY19E).

Our DCF-based PT of R1,102.79 is based on a WACC of 10.2%, earnings CAGR of 9.9% from FY16-19E and 11.3% from FY21-29E. We assume a perpetual growth rate of 6% thereafter. Risks: Increase in royalty and disruptive competition.

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