Kotak upgrades Colgate to ‘Buy’; puts target price at Rs 1,100

By: | Published: March 10, 2017 2:14 AM

We expect CLGT’s revenue growth to recover to double digits and model ~19% EPS CAGR over FY2017-20 aided by 300 bps EBITDA margin expansion on the back of benign RM environment, better leverage and lower A&SP spends (as % of sales).

While we remain cognizant of Patanjali’s rise in toothpaste category and model sustained share gains over FY2017-20, we believe bulk of the damage on CLGT is already in the base. (Reuters)

While we remain cognizant of Patanjali’s rise in toothpaste category and model sustained share gains over FY2017-20, we believe bulk of the damage on CLGT is already in the base. We expect CLGT’s revenue growth to recover to double digits and model ~19% EPS CAGR over FY2017-20 aided by 300 bps EBITDA margin expansion on the back of benign RM environment, better leverage and lower A&SP spends (as % of sales). Relatively reasonable valuations and optional earnings kicker from potentially lower taxation under GST regime provide additional comfort.

Upgrade the stock to BUY (from ADD) with revised TP of R1,100 (from R1,040) as we roll over to March 2019E (34X target PE). As per our internal estimates, Patanjali has already gained ~10% incremental market share over FY2015-17 to reach 12.3% share in toothpaste category with losses distributed across CLGT (260 bps), HUVR (440 bps) and others (ex-Dabur/ GSK-CH, 340 bps); we estimate CLGT’s FY2016 value market share at 52.3% (lower versus 54.7%, as per industry estimates).

We expect CLGT to deliver ~13% revenue CAGR over FY2017-20 aided by 7% volume CAGR and 6% price/mix-led CAGR (aided by price hikes and mix benefits).We expect category growth rates (ex-Patanjali) to inch up back to ~11% (versus 4-6% over past few years) over FY2017-20 aided by low base and macro recovery (especially rural markets).

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