Hold Colgate-Palmolive (India); target of Rs 1540: ICICI Direct

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ICICI Direct's research report on Colgate-Palmolive (India)

Colgate (CPIL) reported a strong performance with a 196 bps expansion in operating margins and 17.2% growth in earnings. Revenues saw a 4.1% decline in sales with toothpaste growth remaining resilient. However, a dip in sales was largely in the toothbrush category, which is relatively discretionary. The impact of lockdown was minimal given consumer stocking & trade pipelines in toothpaste are relatively higher, which would have mostly filled the gap between halt & resumption of manufacturing. We believe the trade pipeline is back (or higher) to pre-Covid levels by the end of June 2020. The company maintained gross margins helped by stable commodity prices. Further, a reduction in A&P spends by 300 bps (as percentage to sales) led to operating margin expansion of 196 bps to 29.6%. Net profit grew 17.2% aided by reduction in corporate tax rate last year.

Outlook

Though the oral care category seems to remain resilient during this disruptive phase, we see limited growth opportunity given high category penetration levels and habit change of brushing twice a day takes almost a generation’s time. Hence, the only growth levels for the company remains premiumisation & shift towards naturals & ayurveda space, which makes us cautious on long term growth prospects. We maintain our HOLD rating with a revised target price of Rs 1540/ share.

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