Analyst Corner: Colgate downgraded to ‘neutral’ with TP of Rs 1,700

With weak topline and earnings growth likely to sustain going forward, the valuation at 37.6x FY23E EPS appears fair.

Colgate-Palmolive (CLGT)’s weak sales growth trend has persisted in recent quarters, including 4QFY21 — the two-year average sales growth stands at 5-6%. It has now been six years since the company reported over 7% sales growth for any year. With (a) the launch of its Non-Oral Care portfolio and (b) investments under the ‘Brush Twice a Day’ campaign seemingly on the backburner, it is unlikely to return to the double-digit sales growth seen over FY08–15 anytime soon.

Notably, certain factors that led to the positive margin surprise in 4QFY21 and the full-year FY21 — resulting in all-time high EBITDA margins — are not sustainable. These include (a) higher priced (and higher margin) SKUs gaining prominence in FY21 on account of customers showing a preference for larger packs, (b) slower sales in the low-margin toothbrush category — as the product is more discretionary than toothpaste, (c) lower-than-expected advertising spends in 4QFY21 and the full-year FY21, and (d) intensifying cost pressure due to crude-led RM inflation.

CLGT is likely to have posted domestic volume growth of 16% YoY in 4QFY21 (est. 17%).

Net sales grew 19.8% YoY to Rs 12.8b (in line with estimates) in 4QFY21. EBITDA was up 60.4% YoY to Rs 4.2b (est. Rs 3.9b). PBT grew 62.7% YoY to Rs 3.8b (est. Rs 3.4b). Adj. PAT grew 54.1% YoY to Rs 3.1b (est. Rs 2.6b). The two-year sales / EBITDA / adj. PAT CAGR came in at 5.5%/16.6%/25.4%.

Gross margins expanded 300bp YoY to 67.7% (in line with estimates).

FY21 sales/EBITDA/adj. PAT grew 7%/25.6%/26.8% to Rs 48.4b/ Rs 15.1b/ Rs 10.4b.

Valuation and view: The cornerstones of our earlier optimism on improved topline growth in CLGT were (a) new launches in Oral Care, (b) a potentially higher play in Naturals (38–39% of the category where CLGT was significantly under-indexed), (c) new launches in Non-Oral Care (~only 2% of sales currently v/s around half the sales for the parent) – leveraging on CLGT’s extensive distribution reach and implementation of the Brush Twice a Day campaign.

While there is no material change in our FY22E EPS, we reduce our FY23E EPS forecasts by ~6%, weighed by weak sales trends and lower margins. With weak topline and earnings growth likely to sustain going forward, the valuation at 37.6x FY23E EPS appears fair. We assign a value of 40x FY23E to arrive at our TP of Rs 1,700/share. Downgrade to Neutral.

Get live Stock Prices from BSE, NSE, US Market and latest NAV, portfolio of Mutual Funds, Check out latest IPO News, Best Performing IPOs, calculate your tax by Income Tax Calculator, know market’s Top Gainers, Top Losers & Best Equity Funds. Like us on Facebook and follow us on Twitter.

Analyst Corner: Colgate downgraded to ‘neutral’ with TP of Rs 1,700Financial Express is now on Telegram. Click here to join our channel and stay updated with the latest Biz news and updates.

Most Related Links :
usnewsmail Governmental News Finance News

Source link

Back to top button