Colgate Palmolive rating ‘Sell’- Check target price; brokerage initiates coverage, cites weak revenue growth

Colgate Palmolive rating ‘Sell’: Check target price; brokerage initiates coverage, cites weak revenue growth

Emkay Research has initiated coverage on Colgate Palmolive India stock and issued a SELL recommendation on the share, with a target price of Rs 1,560 per share, based on a price-to-earnings (P/E) multiple of 33x. This valuation demonstrates approximately a 15% discount to Colgate’s last 5-10 year average forward P/E, which accounts for the weaker revenue growth.

Despite the weaker revenue growth, Emkay Research believes that category-specific initiatives, under the leadership of the Indian CEO who has expertise in managing India businesses, would support related growth. The research note also suggests that business diversification, enabling the Indian entity to tap into the parent company’s portfolio, would help expand Colgate’s presence across household and personal care (HPC) verticals.

The research note highlights Colgate’s enhanced thrust on the premium-end, with a focus on growing market share in the ‘Naturals’ segment and other premium categories like ‘sensitive’ and ‘whitening.’ However, the limited focus on driving category penetration and per-capita consumption in oral care raises concerns, as a significant percentage of rural users do not brush daily.

Valuation anchored by weak execution

Regarding the company’s valuation, Emkay Research notes that the weak execution has kept the valuations around the 5-10-year mean of 38-40x. While the topline growth is expected to remain muted at around 6% (in line with category growth and stable market share), earnings growth is projected at around 9%, aided by improving margins from premiumization efforts.

In conclusion, Emkay Research sees limited development in the oral care segment, and the company’s stock is given a SELL recommendation with a target price of Rs1,560 per share. The research suggests that the new CEO has the potential to revive growth, but certain challenges must be addressed, such as margin fixation and limited focus on category penetration in rural areas. Upside risks include faster recouping of lost market share, raw material deflation, and penetration gains in rural markets.