In its latest report, HDFC Securities is bullish on the shares of FMCG major Colgate Palmolive (India) and says that the company is slated to regain market share in the coming months. Interestingly, the company had posted stellar growth in the latest quarter, with Colgate’s 3QFY18 volume growth recording 12% growth, it’s fastest in the last 12 quarters. “However, volume growth was below the street and our expectation (13.5%). As a result the stock corrected by 8% post the result. Colgate posted revenue/EBITDA/APAT of 5/15/11% YoY during 9MFY18,” HDFC Securities said.
According to the firm, most of the negatives in the company are now priced in the stock (~8% decline since 3QFY18 results and flat on a 12m basis) and Colgate’s toothpaste market share is now at its 2012 levels. “We believe market share has now bottomed out and a re-rating of the stock is on the cards,” the report observed.
Track live stock price: Colgate Palmolive (India)
HDFC Securities says that advertising spend of Colgate is slated to increase in the coming quarters as the company will aggressively pursue new products. “With stiff competition, we see that Colgate would continue to spend a lot on marketing. Hence, we see low-margin expansion of ~120 bps over FY18E-20E vs. 500 bps gained in the past 3 years,” said the report.
Colgate Palmolive shares have corrected by more than 5% since January-18, and a bulk of the correction (more than 4%) has come in the last one month period. In the last one-year period, Colgate stock has returned more than 10%, lagging Sensex returns of 17%.
However, HDFC Securities says that the company is set to recover market share in the coming years. “Our visit gave us confidence in our estimates that Colgate will recover some lost ground and therefore grow at 13% revenue CAGR during FY18E-20E,” the firm said adding that it values Colgate based on P/E of 35x (earlier 34x) on Mar-20 EPS to arrive at a target price of Rs 1,204. Colgate Palmolive shares closed at Rs 1,034.6 on NSE this afternoon. HDFC Securities’ target price implies an upside of more than 16% from the current levels.