FY21/22e EPS down 14/9% due to Covid-19 impact; TP cut to Rs 1,485; ‘Add’ retained as valuations are reasonable
We believe the Covid-19 event presents a solid opportunity for CLGT to start regaining some of the market share lost over the past few years. Patanjali, having just completed a large acquisition, would have its hands full amid a weak demand backdrop. We bake in the Covid-19 impact for CLGT (more a derivative impact of a weaker economy) and cut our FY2021e and FY2022e EPS forecasts by 14% and 9%, respectively. Add stays with a revised fair value of Rs 1,485/share (Rs 1,600 earlier).
Renewed intent meets invigorated actions
FY2020 was an eventful one for CLGT as the new CEO stepped up efforts to gain back some of the ground the company lost in the past few years. The new CEO has been quite categorical about higher focus on volume growth and market share. With portfolio gaps no longer a drag, we believe this signaled the right intent.
The company undertook several measures to back the renewed market share focus – (i) re-staged a couple of large brands in the portfolio; (ii) expanded naturals range; (iii) launched a wider portfolio in the kids segments; and (iv) expanded the Palmolive portfolio after a long time. In addition, the company remained aggressive on brand investments (encouraging though results yet to be seen).
9-14% cut in FY2021-22e EPS
We expect short-term pressure on sales on account of the immediate and derivative impact of Covid-19. We have cut our FY2021e and FY2022e revenue forecast by 12% and 9%, respectively; we now bake in flat revenues in FY2021e followed by a bounce-back (+16%) in FY2022e. Our FY2021e zero revenue growth assumption factors in a volume decline of 1% and a mix-driven realisation improvement of 1% in the toothpaste portfolio. We have factored in a sharper 5% volume decline in the non-toothpaste part of the portfolio.
Margin prognosis stays strong – we have trimmed our operating margin assumptions only marginally and are building around 140 bps cumulative Ebitda margin expansion over FY2020-22e on the back of (i) benign RM intensity; (ii) moderation in adspend intensity in FY2021e; and (iii) aggressive productivity improvement measures in response to Covid-19-induced pressure on topline.
Our DCF-based fair value stands revised down to Rs 1,485/share. Attractive long-term prospects and reasonable valuations (38X FY2022e) EPS) keep us positive. Maintain Add.