Hold Colgate-Palmolive (India); target of Rs 1350: ICICI Direct

ICICI Direct recommended hold rating on Colgate-Palmolive (India) with a target price of Rs 1350 in its research report dated May 23, 2020.

ICICI Direct's research report on Colgate-Palmolive (India)

Colgate (CPIL) reported a dismal set of numbers with 7.4% decline in sales and 8% dip in volumes. The growth was largely impacted by 10 days loss of sales due to the lockdown in the country. The company maintained its gross margins at 64.6% in Q4FY20. However, employee expenses as percentage of sales was up 200 bps manly due to operating de-leverage. The company maintained its marketing spend at Rs 155 crore, which was 100 bps higher (percentage to sales) given decline in sales. CPIL did not withdraw media spend despite disruption at the end of quarter. Other overhead were lower by 50 bps. Operating profit declined 15.4% and margins contracted by 237 bps to 24.5%. With the sharp cut in corporate tax and Rs 30 crore tax reversal, PAT rose 3.3% to Rs 204.2 crore. Adjusting for reversal, PAT fell 5%.

Outlook

Colgate has a wide distribution network of 6 million, which can be leveraged by promoting brands in natural space and foraying in other personal care categories. The natural space (including Ayurveda) is 20% of the category and growing fastest within oral care. However, we believe recent supply chain disruptions (specifically within wholesale channel) would further derail the recovery with the possibility of down trading or shifting towards smaller brands. We value the company at 40x FY22E earnings with a HOLD rating and a revised target price of Rs 1350/share.

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