We are upgrading Colgate to ‘buy’ based on the following factors. Strong potential for growth in the category.
We are upgrading Colgate to ‘buy’ based on the following factors. Strong potential for growth in the category. Encouraging response to competitive intensity in the form of renewed focus on new launches and advertising, which has already helped arrest market share decline in the past two months after a period of subdued performance.
Management’s confidence on growth prospects in our recent meeting. Colgate’s extremely strong moats on distribution, category development efforts, brand strength, concentrated focus in oral care and demonstrated success of its Indian R&D center. Remarkable track record in tackling competition in oral care, both in India and other emerging markets. While recovery in sector demand is still some time away, and competitive intensity is likely to remain high in FY17, likely good monsoon and government schemes are expected to provide a fillip to demand.
Colgate, with over a third of its sales coming from rural India, is likely to be a major beneficiary. Colgate’s long-term earnings growth potential remains high, return ratios best of breed, OCF and FCF generation impressive, and the stock’s valuations appear reasonable post the decline of 16% in its price from its peak levels. P/B is close to decadal lows, and P/E is lower than both five-year average and MNC peer multiples. India’s oral care category per capita consumption and premiumisation are among the lowest even in comparison to that in the other emerging markets.