Poised for strong earnings growth over medium term Inexpensive valuations bolster upside potential
We recently met Colgate’s (CLGT) management to understand its strategy to drive growth amid changing market dynamics. Key highlights: CLGT’s market share has been stable over the past few quarters. Volume growth and market share expansion have taken precedence as part of its new strategy, even if it is at the cost of near-term profitability.
Direct reach has increased by 30% over the past year. Good Rabi crop may not necessarily translate into a significant boost for FMCG sector volumes. It may take rural growth at par with urban growth. Anything additional will be a bonus.
Premiumisation is back in focus: No material downtrading is happening either. No material capex required until December 2022.
We remain bullish on CLGT from the medium-term perspective, given its reasonable valuations (39.7x FY21E EPS – a huge discount to MNC peer multiples of 50x-56x), likely escalation in earnings momentum and sharp potential improvement in the already impressive RoCE. Targeting 45x Sep’21E, we maintain our target price of Rs 1,815 with a ‘buy’ rating.
Volume growth recovery to be gradual: Demand has neither revived nor slipped in recent months compared to 3-4 months ago. According to management, the expected good Rabi sowing may not materially alter the demand scenario in rural India for the FMCG sector. At the most, it expects rural growth – which had slipped below urban growth over the past two quarters – to come at par but not surpass urban growth, at least in the next few quarters. This is in contrast to the scenario three quarters ago when rural growth was well above urban and driving overall growth for the sector.
Corporate tax cut benefits yet to be passed on: Management has not yet passed on the benefit of corporate tax cuts either in the form of price reductions or ad spends. In our view, CLGT is waiting for some revival in demand before going the whole hog on adspend/promotion.