Colgate: Riding high on consistent market share gains

Last Updated: Wed, Oct 31, 2012 19:52 hrs

Higher-than-expected earnings before interest, tax, depreciation and amortisation (Ebitda) margins and net profit for the September quarter have sent the Colgate scrip spiralling (up five per cent) in the past two days. The results, which came out after market hours on Monday, reflect the company’s resilient volume- (up 10 per cent) cum-price (up about seven per cent) growth — notwithstanding aggressive competition and higher raw material costs. Notably, the company continues to gain market share across categories, reflecting its dominance in the oral care business.

The Colgate stock made a new 52-week high of Rs 1,269 on Tuesday only to top this high on Wednesday, when it touched Rs 1,301, as compared to a flat Sensex. Given the stock’s recent rise and current valuations, analysts believe significant near-term upsides remain capped.

“We expect P&G to enter toothpaste over the longer term, which is the key risk to Colgate. The stock is trading at 30.6 times and 26.6 times FY13 and FY14 estimated earnings, respectively, and appears fairly valued over the near term. We maintain hold,” believes Abneesh Roy of Edelweiss Securities. However, business prospects remain strong and, hence, most analysts are positive and believe long-term investors could consider the stock at dips. Factoring in the strong value growth in the September quarter, analysts have also raised their revenues and earnings estimates by two-five per cent for FY13, as well as FY14.

“We are enthused by Colgate’s constant market share gain and resilient price-led growth despite a tough scenario. On account of Colgate’s dominating presence in the oral care segment and postponement of P&G’s entry, we have rationalised advertising expenses assumptions, thereby increasing Ebitda margin expectation by 30 basis points for FY13 and FY14 each,” believe Pritesh Chheda and Harsh Mehta of Emkay Global, who have upgraded the stock to ‘buy’ with a target price of Rs 1,400.

Strong volume growth of 11 per cent in the toothpaste segment along with price hikes boosted the top line of Colgate in the quarter gone by. The company’s consistent market share gains in the toothpaste category (up 200 basis points year-on-year (YoY) in the first nine months of CY12) and strong market share in the mouthwash (27 per cent) category are key positives.

The company, which has a strong toothpaste portfolio, launched new products — Colgate Total Advance Whitening and Max Fresh Ice toothpastes, which should enable it to protect its market share, going ahead. Analysts expect the company to post 10-12 per cent volume growth in the toothpaste category this financial year. Also, the mouthwash category should increase premiumisation, believe analysts.

Strong expansion in Ebitda margins came as a positive surprise as higher input costs were offset by lower employee costs (down to seven per cent of sales - lowest in the past 20 quarters; partly due to one-time expenses in the year-ago quarter) and other expenditure. Further, lower taxes led to higher than anticipated net profit growth for Colgate. Nevertheless, even if one were to adjust for the exceptional items of last year, adjusted profits would have grown at a robust pace — Emkay analysts estimate these to have grown by 34.5 per cent over a year.

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