Analysts cheer Colgate's growth plans and focused product innovation

Focus on modern trade and market share gains has led brokerages to hike their target price estimate for the stock

At least 10 brokerages hiked their target price estimate (average Rs 1,670) for Colgate-Palmolive (India) over the weekend as the toothpaste leader highlighted its efforts to drive profitable growth.

The latter has come as a pleasant surprise given that Colgate's volumes, after growing between 9 per cent and 14 per cent during FY08-FY14, have seen a sharp deceleration to between -1.5 per cent and 5.5 per cent during FY15-FY20.

A key reason for the high volume growth rates of FY08-FY14 had been the company’s focus on increasing penetration rates, which surged to as high as 88 per cent for Colgate's brands. The management acknowledged that replicating such high growth appears difficult, and incremental growth will, therefore, come by focusing on product innovation and improving distribution.

Colgate has increased focus on product innovation by building platforms — developing a range of products under a particular brand, which helps increase traction for the overall brand, as well as enhance consumer engagement. As part of this strategy, it has refreshed the “Vedshakti” brand with new packaging and plans to expand in adjacent oral care categories, and launch several new products across brands.

“Even as most of these NPDs (new product developments) are in niche segments, the clear intent is to focus on a larger play in the oral care category, play the role of a category-leader by expanding the pie through premiumisation, and gain dominance in the problem-solution segment,” said Kotak Securities.

Colgate continues to strengthen its e-commerce team, broadening its presence across platforms, and increase focus on data analytics and product availability. Its e-commerce business has grown 11 times over the last four years, and saw a 13 per cent market share gain in 2020 on a year-to-date basis.

Even as growth is in focus, the company expects the gross margin to sustain at the current level, aided by an improvement in brand and SKU mix, despite a likely increase in ad spends, as compared to the first half of 2020-21. Overall, the company expects to deliver healthy volume growth, along with margin expansion, and not one at the cost of the other — which is positive, say analysts.

Motilal Oswal Securities estimates Colgate’s earnings to grow 14.3 per cent and 9.3 per cent in FY21 and FY22, respectively. “Valuations at (P/E) at 42.6 times and 36.4 times for FY22 and FY23 are not particularly expensive for a business that may potentially grow earnings in double digits and has the best ROCE (return on capital employed). Also, with Rs 40 per cent of its sales coming from rural India, the outlook for volume growth is good for the next few quarters,” says the brokerage.

But, considering the recent surge in Colgate’s share price, long-term investors may want to await a correction for a better entry.