Patanjali worries provide a good entry point: Even as we appreciate the concerns around Patanjali’s success in the oral care segment and bake in additional conservatism in our forecasts for CLGT, we see the current levels (<30X FY2018e PE; 15%+ discount to HUVR) as a fairly decent entry point into what we continue to see as among the top consumer franchises in the market. Rollover to March 2018 drives modest increase in target price to Rs 910 (from Rs 900). Upgrade to ADD from REDUCE.
Patanjali impact—we cut EPS estimate by 3-4% as we factor in extra conservatism
Backed by strong herbal/naturals appeal and discounted pricing (competing brands retail at 7-20% premium), Patanjali Ayurved has become a strong force in the toothpaste category with its Dant Kanti brand. We estimate Patanjali’s value market share for FY2016 at 2.5% (exit share would be higher at ~3-3.5%), which is commendable given P&G at its peak was able to garner just ~1.5% market share. We expect Patanjali to garner 500 bps cumulative incremental share over FY2016-18e driven by distribution expansion and higher A&P spends; bulk of this share gain is likely to come from CLGT and HUVR (we model 200 bps share loss for both), in our view due to lack of a strong relevant herbals portfolio.
We have cut our CLGT EPS estimates for FY2017-18e by 3-4%; we note we are now 4-7% below consensus estimates. Key assumptions driving our FY2016-18E forecasts—(i) 11% revenue CAGR (4-5% volume CAGR and 6-7% price/mix-led growth); we note that our assumptions do not call for any meaningful acceleration in volumes from 2-3% volume growth witnessed over past four quarters, (ii) toothpaste industry to grow at 12-13% in value terms; at similar levels to growth rates achieved over the past five years and (iii) absolute A&P spends to grow at 12% CAGR versus flattish spends over the past three years; a tad higher versus revenue growth.
Valuations reasonable post sharp correction; upgrade to ADD with revised TP of Rs 910
We see the recent sharp correction as a good opportunity to accumulate a strong franchise; we highlight multiple reasons—(i) despite baking in Patanjali impact, we expect CLGT to deliver a healthy ~12% EPS CAGR over FY2016-18e as excise impact gets in the base, (ii) reasonable valuations; CLGT is trading at ~8-10% discount (on 1-year forward P/E) to both consumer sector (ex-ITC) and its 5-year historical average, and (iii) CLGT’s past track record to battle competition (Close-Up in 80s, Pepsodent in late 90s, local players like Balsara, Anchor etc. over 2002-05 and recently P&G); innovation, higher A&P spends, pricing realignment in select sub-brands/SKUs and potential acquisition are likely tools to be used by CLGT to tackle Patanjali.
We upgrade the stock to ADD from REDUCE with a revised TP of R910/share (from Rs 900), as we roll
forward to March 2018e EPS-based on 33X target multiple .
— Kotak Institutional Equities