Colgate-Palmolive: Getting more shine

Outlook improves as company garners additional market share

Colgate-Palmolive India Limited (Colgate)’s stock has witnessed six-seven ratings upgrade to ‘Buy’ from ‘Hold’ in September alone. Expectations of strong margin gains in FY15 and FY16, continued innovations and strong earnings visibility are some reasons this.

The scrip had under-performed the S&P BSE Sensex until recently largely due to the concerns surrounding entry of its peer, Procter and Gamble (P&G), in the toothpaste segment via the Oral-B brand. But, these concerns are easing. To maintain its leadership position in the segment, Colgate became aggressive not only on advertising and promotions, but on new launches. This has helped Colgate expand its market share (up 110 basis points to 57 per cent in past one year) in the segment.

Additionally, while these gains came at the cost of its Ebitda (earnings before interest, tax, depreciation and amortisation) margin, which contracted 220 basis points year-on-year to 18.6 per cent in FY14 (P&G entered India's toothpaste market in June 2013), margins have rebounded to 20.4 per cent in the June 2014 quarter.

Analysts expect Colgate to register Ebitda margin gains of 100 basis points this financial year and about 80 basis points in FY16, driven by stable ad spends (as a per cent of sales). Colgate's advertising and promotional spends (as a per cent of sales) had surged over 350 basis points year-on-year to 19.4 per cent in FY14. However, as Colgate has garnered additional market share and the fact that Oral-B toothpaste has not seen much success, analysts expect this metric to hover around 19.3-19.5 per cent levels in FY15 as well as FY16 and thus aid margins.

Besides margin recovery, Colgate's volume growth trends, too, have been encouraging. Notwithstanding a four per cent volume fall in toothpaste industry in June 2014 quarter, Colgate's volume grew by five per cent. Analysts expect the company's volume growth to be around nine per cent this financial year and inch up to about 10-11 per cent in FY16 on the back of continuous innovations. It has also maintained its leadership position in toothbrush segment with market share of 42.6 per cent.

Colgate also plans to focus on premiumisation (therapeutic segment, sensitivity, cavity protection) and increase its rural footprint to fuel further growth. Analysts expect its net income to grow at compound annual growth rate of 22 per cent over FY14-17. The stock currently trades at 33.5 times FY16 estimated earnings, but lower than peak valuations of 43.7 times.