Recommendation From Personal Products Sectors

This column gives you scrip chosen by the research team during the fortnight that is fundamentally strong and expected to give good capital appreciation over a time period of 1 year.

Colgate Palmolive 

DIVERSIFYINGINTO'NATURALS'TODRIVEGROWTH 

HERE IS WHY
Investing in branding to maintain leadership
position
Traction in newly launched product
Diversifying by entering new segments

Colgate Palmolive (India) Limited (CPL) is engaged in the personal care and oral care business. Its personal care products include soaps, cosmetics and toilet preparations, whereas its oral care products include toothpastes, tooth brushes, tooth powder, whitening products and mouthwash. 

CPL has one of the widest distribution networks in India. It is available in more than 5.8 million retail outlets across the country. The company has a leadership position in both the toothpaste and tooth brush categories with volume market share of 53.7 per cent and 45.1 per cent, respectively. Over the last four quarters, there has been a decline in sales volume. However, the trend has reversed and the management appears confident of sustaining the positive momentum. Also, the sequential slide in market share in toothpaste segment has been arrested during the quarter. 

This can be credited to the company’s aggressive investing in branding. The company spent Rs120.7 crore on advertising in Q3FY18, up 43 per cent from Rs83.91 crore in the corresponding quarter last year. The company had spent Rs119.23 crore on advertising in Q2FY18. 

Also, CPL’s core competency of delivering innovations based on consumer insights has helped it strengthen its natural products portfolio. The company launched Colgate ‘Swarna Vedshakti’, which is gaining more traction than the earlier variant, thus reinforcing its naturals offerings. On the financial front, the net sales of the company increased 4.25 per cent to Rs1033.32 crore in the third quarter of FY18 as against Rs991.22 crore in the same quarter of the previous year. The company’s PBDT increased 29.56 per cent to Rs291.46 crore in the third quarter of FY18 on a yearly basis. The company’s net profit increased 33.31 per cent in the December quarter to Rs170.65 crore as against Rs127.82 crore in the same period last year. 

On an annual basis, the company’s net sales increased 8.60 per cent to Rs4,520.20 crore in FY17 on a year-on-year basis. The net profit of the company remained flat with 0.16 per cent increase to Rs577.43 crore in FY17 as against Rs576.51 crore in the previous fiscal. 

On the valuation front, the company has a PE ratio of 45.88x as against its peers Hindustan Unilever (56.83x) and Godrej Consumer Products (50.83x). The company’s return on equity (RoE) and return on capital employed (RoCE) stood at 50.11 per cent and 91.61 per cent, respectively. CPL has a good RoE track record with 3-year RoE of 63.67 per cent. The company is virtually debt-free. The company has been maintaining a healthy dividend payout of 50.67 per cent. 

We expect the company’s strategy to enter new segments and innovate new products from salt, Neem, Ayurvedic products, etc., while focusing on its core segments to drive its growth going forward. Also, the slide in its market share has been arrested for now, which is a key positive. We recommend our reader-investors to BUY the stock.