HSBC maintains ‘Buy’ on Colgate-Palmolive, raises target price to Rs 1,100

By: | Updated: August 30, 2016 7:49 AM

Volume growth trajectory stepped up, which is in contrast to the demand picture on average for the rest of the staples and also alleviated concerns that Patanjali has been able to impair volume growth in Colgate’s case and as a result, Colgate reported an increase in market sharegs....

COLGATE PALMOLIVE, GROWTH, INDUSTRY NEWS, COMPANY NEWSIn our view, volume growth acceleration (even if it comes at the short-term expense of margins) will remain the most important catalyst for the stock’s performance.

Volume growth trajectory stepped up, which is in contrast to the demand picture on average for the rest of the staples and also alleviated concerns that Patanjali has been able to impair volume growth in Colgate’s case and as a result, Colgate reported an increase in market share sequentially over the previous quarter where there was a marginal dip, signalling that Colgate market actions have responded well (through its product centric response of natural extensions of its core brand and trade).

In our view, volume growth acceleration (even if it comes at the short-term expense of margins) will remain the most important catalyst for the stock’s performance.

We believe the outlook for volume growth remains quite encouraging now, with rural recovery in the offing and Colgate’s aggressive push in the natural segment (with its Cibaca VedShakti launch at a 30% lower price than Patanjali’s DantKanti), which should help accelerate volume growth in the second-half and may further re-rate the stock.

Colgate’s multiples are building in one of the lowest annualised earnings growth rates (c11%) among stocks in our coverage universe, which we think is quite reasonable. In our view, Colgate has the dominant scale, best cost economics of the oral care category, an astute strategy to monetise the long term structural growth in the oral care segment.

We increase our DCF-based TP to Rs 1,100 (from Rs 1,050) as we revise our estimates and roll our valuation forward. We maintain our buy rating on the shares.

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