Despite a 25% year-to-date underperformance to Sensex, we reiterate our Underperform rating on Colgate (CLGT). Key reasons for this are: 1) toothpaste as a category is close to the maturity level in the urban markets, so future volume growth could to slow down and 2) soft margins are likely to persist due to heavier competition.
While we cut our estimates by 9% for FY15/16E to bake in higher A&P, we retain our target price at Rs 1,150 due to roll forward.
Penetration levels in toothpaste are currently at 91% in urban and 63% in rural markets.
We expect urban areas to reach maturity in another couple of years. Accordingly, volume growth ? a key stock driver ? could soften. However, we expect Colgate to protect market share due to its strong portfolio across price points.
CLGT has seen a consistent decline in Ebitda margins since FY10. While this was likely due to higher input and manufacturing costs, going forward, margins can sustain at lower levels as higher A&P spends persist due to competition.
Also, as the penetration levels in the category rise, the upside risk to margins will be limited.
The toothpaste category?s approaching maturity in urban markets, along with higher competitive intensity versus the past, makes the risk-reward unfavorable, in our view.
Any new launches in unrelated segments could mean a burn in the initial years. We reiterate our Underperform rating.
BofA ML
