Colgate Palmolive - Strong gums to the portfolio - Shah Investor's Home

Colgate Palmolive Ltd. (Colpal), market leader with (54% market share) in toothpaste segment has been clocking double digit volume growth for last many quarters driven by strong distribution network and new product launches backed by aggressive promotion. We expect Colpal to maintain its dominant position in Indian Oral care industry and new product launches from competitor or new entrants will only be able to snatch some market share from the existing local brands, and not from a market leader like Colpal which would drive revenue CAGR of 19.1% FY12-15E against 15.5% CAGR over FY10-12. We estimate Colpal to generate free cash flow of Rs.1,389 Cr. and post improvement of RoE/RoCE by 172 bps/987 bps, respectively, over FY12-15E. Given its strong brand equity, higher cash flow generation and dividend payout ratios (around 70%), we assign a BUY rating to Colpal with a Target price of Rs.1445, upside potential 21.5%, based on PE of 31.7x FY14E EPS of Rs.45.6.

Dominant market Position

Colpal is market leader in Indian oral care industry (Rs.4,500 Cr.) with 54.5% of volume share in toothpaste market and 38.2% market share in toothbrush segment, as of end June 2012. The company has developed strong brand equity and amazing penetrative reach, particularly in rural areas which accounts for 40% of volumes. Realization in Premium products such as Colgate Sensitive Pro Relief toothpaste and Sonic 360 toothbrush is 2-5x higher than normal. Such products are fast gaining acceptance and growing significantly faster. We expect this trend to continue and forecast 19.1% revenue CAGR over FY12-15E.

Strong Financials

Colpal is a zero debt company which is the strongest point in high interest rate scenario. Colpal operates on negative working capital, generating Rs.980 Cr. of free cash flow over FY10-12. We expect this trend to continue and forecast Rs.1,389 Cr. of free cash flow generation over FY13-15E. Following higher cash return on assets ratio, stable operating margin and negative working capital, RoE/ROCE would improve by 172 bps/987 bps to 104.3%/133.7%, respectively, over FY12-15E and also result in expansion of valuation multiples.

Valuation

At CMP, Colpal trades at 26.3x P/E based on FY14E EPS of Rs.45.6 vs. 25.3x P/E on FY14E EPS of its peers; 17.9% EPS CAGR over FY12-FY14E vs. 16.8% CAGR of the FMCG universe likely over FY12-14E. Dividend yield stands at 2.9%, higher than its peers at CMP assuming similar dividend payout ratios in FY14E. We estimate Target Price of Rs.1445 which 31.7x FY14E EPS of Rs.45.6, upside potential of 21.5%.

Source : Equity Bulls

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