BUY

Initiating Coverage Colgate Palmolive (India) Ltd. Target Price

09th Sept 2020 FMCG 1,565

CMP as of Sept 8, 2020

ATTRACTIVELY PRICED SMILE
CMP (Rs) 1,363
We initiate coverage on Colgate Palmolive (India) Ltd. (CLGT) with a BUY
recommendation and a Target Price of Rs. 1,565, which implies 15% upside from current Upside /Downside (%) 15%
levels. We expect CLGT to register Revenue/PAT CAGR of 8%/11% over FY20-23E driven by High/Low (Rs) 1,643/ 1,065
1) low per capita consumption in India versus other global markets; 2) susteance of market Market cap (Cr) 37,151
leadership; 3) strategic focus on growing volume; 4) renewed aggression on deepening
distribution in under penetrated regions and channels; 5) step up in innovation/new launches; 6) Avg. daily vol. (6m) Shrs. 9,80,765
healthy margin profile and 7) strong balance sheet. At CMP, stock trades at fairly attractive No. of shares (Cr) 27.2
valuations of 33x its FY23E EPS (42x – 10 year average PE) thus offering decent scope for
upsides given promising growth outlook from a medium to long term perspective. We value the
Shareholding (%)
stock at 38x its FY23E EPS to arrive at our Target Price.
Dec-19 Mar-20 Jun-20
OUR INVESTMENT THESIS IS BASED ON THE FOLLOWING PREMISES
Promoter 51.0 51.0 51.0
Prioritizing sustainable sales growth driven by mix of volume/value growth
FIIs 16.5 16.2 15.3
COVID-19 pandemic offers an opportunity to brands with higher salience given consumers
MFs / UTI 5.1 3.7 5.1
heightened consciousness on maintaining health & hygiene. This could result in driving up
frequency of brushing more than once to ensure better oral hygiene. Even a slight shift in Banks / FIs 0.2 0.3 0.3
brushing habits coupled with low per capita consumption, strengthening core and focus on Others 27.3 28.9 28.4
branding could drive up volumes for Colgate over the medium term. Resultantly, we expect,
CLGT to deliver a 7% volume CAGR over FY20-23E.
Financial & Valuations
Market leadership in an essential’s category a key competitive advantage Y/E Mar (Rs. bn) 2021E 2022E 2023E
CLGT is a leader in the toothpaste and toothbrush category with 52%/45% volume market share Net Sales 46.6 50.8 56.2
in India as of FY19. Although the company’s market share declined from FY16 to FY19 owing to EBITDA 12.5 14.0 15.8
competition, the same has now stabilized with improvement of ~80bps in Q4FY20 as indicated
Net Profit 8.6 9.8 11.2
by the management. We believe there is limited scope for downtrading in a stable growing oral
care category as 70-75% sales is from mass/economy segments. Even today, per capita EPS (Rs.) 31.7 36.0 41.2
consumption of toothpastes in India is <200gms versus China (+300gms), Brazil (600gms) and PER (x) 43.0 37.8 33.1
USA (500gms). This augurs well for CLGT to grow penetration and thereby maintain its EV/EBITDA (x) 29.3 26.1 23.1
competitive advantage.
P/BV (x) 24.1 24.2 23.1
Stepping up distribution reach and new product launches ROE (%) 56.0 63.9 69.8

Under Mr. Ram Raghavan’s (MD) leadership, Colgate’s strategy is to drive volumes led by
increasing distribution reach acorss rural areas (75% toothpaste penetration), emerging Key Drivers (%)
channels (e-com & Modern Trade) and by stepping up new product launches. Over the past Y/E Dec FY21E FY22E FY23E
year, CLGT has expanded its direct distribiution reach by 30% while focusing on growing rural Sales Growth 3.9 9.0 10.6
penetration alongside urban. Besides, it also launched products in niche spaces in toothpaste
Gross Margin 65.3 65.7 65.9
and brushes segments across kids/naturals/anti-bacterial (oral hygiene importance) and electric
toothbrushes. EBITDA Margin 26.8 27.5 28.0

Healthy Gross Margins and balance sheet metrics

CLGT enjoys healthy Gross Margins compared to some of its peers which has helped it spend Axis Sec vs Consensus
aggressively on A&P (including category development efforts). This has been aided by
company’s market leadership and pricing power in toothpaste and toothbrush category versus EPS Estimates FY21E FY22E FY23E
peers like HUL (17% share), Dabur (15% share) and Patanjali (9% share). Its dominance in the Axis Sec 31.7 36.0 41.2
category has led to strong pricing power, negative working capital, strong return ratios and
Consensus 31.6 35.2 39.5
sustainably generating healthy cash flows. Over FY20-23E we expect CLGT to report ROEs of
63%/69% in FY22/23E. Consensus (Mean) TP 1,448

ENCOURAGING SMILES – INITIATE WITH BUY

Initiate coverage with BUY rating and TP of Rs. 1,565/share, valuing the company at 38x P/E
Relative performance
basis its FY23E EPS which is at a discount to its 10 year average valuation of 42x P/E. We
believe CLGTs market leadership position in a stable growing category, strong parentage, 140
robust margin profile, renewed aggression on distribution, product launches and a strong
120
balance sheet are key winning features in the market place over the medium to long term.
Key Financials (Consolidated) 100

80
(Rs. Cr) FY20 FY21E FY22E FY23E
Net Sales 4,488 4,663 5,082 5,619 60

EBITDA 1,164 1,252 1,398 1,575 40

Net Profit 816 862 980 1,122 Sep-19 Mar-20 Sep-20
Colgate Palmolive (India) Sensex Index
EPS (Rs.) 30.0 31.7 36.0 41.2
PER (x) 45.4 43.0 37.8 33.1 Source: Capitaline, Axis Securities
EV/EBITDA (x) 31.5 29.3 26.1 23.1
P/BV (x) 23.3 24.1 24.2 23.1 Suvarna Joshi
Sr. Research Analyst
ROE (%) 51.2 56.0 63.9 69.8
Source: Company, Axis Research Call: (022) 4267 1740
email: suvarna.joshi@axissecurities.in

1
Story in charts
Exhibit 1: Volumes expected to report 6% CAGR over FY20-23E… Exhibit 2: …Resulting in an 8% Sales CAGR over FY20-23E
10 5.619
6.000 12
7,9 5.082
8 5.000 4.488 4.663 10
6,9 4.432
3.951 4.159
5,8 5,9 4.000 8
6
3.000 6
4
2,5 2.000 4
2
0,6 1.000 2

0 0 0
FY17 FY18 FY19 FY20 FY21E FY22E FY23E
-2 (1,0)
FY17 FY18 FY19 FY20 FY21E FY22E FY23E

Volume Growth Est. YoY (%) Net Sales (Rs cr) Net Sales Growth YoY (%) (RHS)

Source: Company, Axis Securities Source: Company, Axis Securities

Exhibit 3: Healthy Gross Margins to support investments in A&P… Exhibit 4: …Consistent investment in brands reflected in A&P spends

68 12 10.000 15
14,1
10 14,0 13,8 14,0
8.000
66 14
8 12,7
13,0 12,7
6.000
64 6 13
4.000
4
62 12
2 2.000
62,6 64,2 64,8 65,0 65,3 65,7 65,9
60 0 0 11
FY17 FY18 FY19 FY20 FY21E FY22E FY23E FY17 FY18 FY19 FY20 FY21E FY22E FY23E

Gross Margin (%) Gross Profit Growth YoY (%) (RHS) A&P (Rs.cr) As % of Sales (RHS)

Source: Company, Axis Securities Source: Company, Axis Securities

Exhibit 5: Cost control and better mix to support EBITDA Margin Exhibit 6: Op. performance to drive 11% PAT CAGR over FY20-23E

32 20 24 20
28
15 20 15
24
20 16 10
10
16 12 5
12 5
8 0
8
0
4 -5
4
23,1 26,1 27,2 25,9 26,8 27,5 28,0 14,6 16,5 16,8 18,2 18,5 19,3 20,0
0 -5 0 -10
FY17 FY18 FY19 FY20 FY21E FY22E FY23E FY17 FY18 FY19 FY20 FY21E FY22E FY23E

EBITDA Margin (%) EBITDA Growth YoY (%) (RHS) PAT Margin (%) PAT Growth YoY (%) (RHS)

Source: Company, Axis Securities Source: Company, Axis Securities

2
Exhibit 7: Healthy Return Ratios to sustain over FY20-23E Exhibit 8: Stable Working Capital Cycle

80 80 0
Return Ratio 71,6
70 64,0
60 -10
55,2 69,8
60 52,1
50,1 63,9
49,0 48,5 40 -20
50 56,0
51,5 51,2
40 45,3 44,9 20 -30

30
0 -40
FY17 FY18 FY19 FY20 FY21E FY22E FY23E
20
FY17 FY18 FY19 FY20 FY21E FY22E FY23E
Debtor Days Inventory Days
ROE (%) ROCE (%) Creditor Days Net Working Capital Days (RHS)

Source: Company, Axis Securities Source: Company, Axis Securities

Exhibit 9: Lower Capex intensity over FY20-23E to improve FCF Exhibit 10: Colgate Palmolive (India) Sales mix FY20

1.200
1.000
800 15%

600
0%
400
200
-
85%
(200)
(400)
FY17 FY18 FY19 FY20 FY21E FY22E FY23E

Toothbrush Others Toothpaste & Toileteries

FCF (Rs.cr) Capex (Rs. cr)

Source: Company, Axis Securities Source: Company, Axis Securities

Exhibit 11: 12M FWD PE CHART (x) Exhibit 12: 12M FWD PE BAND CHART

2400 53

2000 48

1600 43

1200 38

800 33

400 28
Dec-17

Dec-18

Dec-19
Sep-17

Sep-18

Sep-19

Sep-20

Dec-19
Sep-17

Dec-17

Dec-18

Sep-19

Sep-20
Sep-18
Mar-17

Mar-19

Mar-20
Mar-18

Mar-17

Mar-20
Mar-18

Mar-19
Jun-17

Jun-18

Jun-20
Jun-19

Jun-17

Jun-20
Jun-18

Jun-19

Price 30x 40x 50x 60x Mean Mean+1Stdev Mean-1Stdev PE

Source: Company, Axis Securities Source: Company, Axis Securities

3
Key Investment Arguments
Prioritizing sustainable sales growth driven by mix of volume/value growth

Outbreak of COVID-19 pandemic has led to heightened awareness among consumer’s on maintaining health and hygiene and could be a key
catalyst in driving increased demand for consumption of oral care products. CLGT indicated ~80% of children in India suffer from oral health issues
and another 70% of the children surveyed do not brush teeth twice a day. A larger proportion of these children are in the rural regions than urban.
Further, about 1/3rd of the total population does not have access to oral care despite the penetration of oral care products in urban regions being
over 90% while in rural towns and villages penetration is at 75%. Reverse migration of people back to their home towns/villages could drive habit
change back home towards better oral hygiene care, increased awareness about maintaining oral hygiene by CLGT are expected to drive volumes
going ahead for a stable category in unstable times. With increasing movement of people driven by lockdown relaxations masks usage will
increase that will necessitate people to maintain oral hygiene driving increased consumption of oral care products like mouthwashes. In Q1FY21,
CLGT’s toothpaste volumes decline was in low single digits (1-2%) much better than peers. However, its overall volume declined by 8% owing to
sharp reduction in toothbrush and body wash categories which are more discretionary in nature. Going forward we think, brands with higher
salience could do well given consumers preference towards branded products that offer better quality and assurance of safety which are critical in
current times.

Exhibit 13: Toothpaste Market grew at 8.5% CAGR as of FY18 Exhibit 14: Low Per Capita toothpaste consumption in India (2017-18)

12.500 20 700
600
10.000 600
15 500
500
7.500
10 400
gms/1000
+300 310
5.000
300
5 <200
2.500 200

0 0 100
2013 2014 2015 2016 2017 2018 0
India China Phillipines USA Brazil

Toothpaste Segment (Rs.cr) % Growth YoY (RHS)

Source: Company, Axis Securities Source: Company, Axis Securities

Market leadership in an essential’s category a key competitive advantage

CLGT is a leader in the toothpaste and toothbrush category with 52%/45% volume market share in India as of 2018. Although company’s market
share declined from FY16 to FY19 owing to competition (Patanjali’s Dant Kanti), the same has now stabilized and we note it increased by ~80bps
in Q4FY20. We believe there is limited scope for downtrading in a stable growing oral care category as 70-75% sale is from mass/economy
segments. Even today, per capita consumption of toothpastes in India is <200gms versus China (+300gms), Brazil (600gms) and USA (500gms).
Management also believe, increasing per capita consumption remains a big opportunity as it conducted a pilot program in urban areas of Delhi and
Mumbai, results of which have been encouraging. This we think augurs well for CLGT to grow penetration and thereby maintain its competitive
advantage over the medium to long term. Besides, amongst the Dentists fraternity, Colgate continues to be a highly recommended toothpaste vis-
à-vis peers indicating product efficacy and functional benefits which has led it to be a market leader in the oral care category.

Exhibit 15: Toothpaste market share fall arrested driven by volumes… Exhibit 16: Continues to lead in the Toothbrush category…

Source: Company, Axis Securities Source: Company, Axis Securities

4
 Exhibit 17: Market leadership in Consumer Brand Equity maintained… Exhibit 18: Most recommended toothpaste by Dentists

Source: Company, Axis Securities Source: Company, Axis Securities

Step-up in NPD launches innovation and renovation

Since, Mr. Ram Raghavan took charge as MD of Colgate Palmolive (India) in 2019 the company’s strategic focus has shifted to driving volume led
growth and focus on market share gains driven by direct distribution to recoup some of the lost market share. As a result, we have seen visible
efforts on branding by CLGT via sharp increase in ad-spends in recent quarters although in Q1 A&P was 11% of sales impacted by COVID, focus on
new product development and filling up white spaces. In the recent past the company has launched products that helped to fill up certain white
spaces in its oral care/personal care portfolio to keep the momentum going. Some of the recent innovations were in the kids’s toothpaste segment
with zero articfical colors/flavours/preservatives and theme based launches with cartoon characters that have a larger appeal with children. It also
relaunched its flagship brand Strong Teeth fortifies with ‘Amino Shakti’ which is claimed to be clinically surperior. In our view there could be amplified
series of innovation going forward which is in line with CLGTs strategy outlined in Q4FY20.
Launches have also been made in the Naturals category which is seeing strong growth traction given consumers preference towards natural
products (COVID-19 accelerated adoption of naturals products). Charcoal Clean in black range (premium toothpaste) was launched by CLGT, this is
seeing strong traction (urban and modern trade channel) since its launch and company mentioned that it has gained market share despite COVID-19
led challenges within three months of its launch. Re-launched Colgate Total Advanced Health with anti-microbial toothpaste with added benefits. On
the toothbrush segment, CLGT is looking to capture the broader naturals ingredient trend as it launched toothbrushes with – neem/charcoal based
toothbrushes and 100% Bamboo made. Also, launched eletric toothbrushes at affordable prices which are battrey powered. On the personal care
portfolio, it made a few launches in the Palmolive range of products through introduction of Hand Sanitizers, Liquid handwash and body washes
under the Luminous Oils range.

Exhibit 19: Innovation in new/existing products to remain ahead of competition

Source: Company, Axis Securities

5
Exhibit 20: Consistent launches/re-launches with added benefits

Product Category Product Launch / Re-launch Benefits / Innovation

Oral Care
Colgate Kids range of toothpaste
Colgate Strong Teeth with Amino Shakti
Toothpaste
Colgate Charcoal Clean Black Gel
Colgate Swarna Vedshakti
Colgate Total Charcoal Deep Clean
Colgate Bamboo Toothbrush
Toothbrush
Colgate Pro Clinical Electric Toothbrush
Colgate Zig Zag Neem
Personal Care
Palmolive Hand Sanitizer
Skin Care Palmolive Facial Bar
Palmolive Luminous Oils Shower Gel
Source: Company, Axis Securities
No artificial colours/ preservatives/ flavours/ sweeteners
Arginine + Fluoride gives protection from mineral loss against acid
attack
Bamboo charcoal and mint with enamel protection, stain removal and
fresh breath
Ayurvedic ingredients - tulsi, honey, neem, aloe vera, amla, laung
With Dual Zinc and Arginine (DZA) – superior protection from problem-
causing germs
Bristles infused with bamboo charcoal, tipped with floss and comes
with zero plastic packaging
Premium Battery powered toothbrush
Bristles infused with Neem extract
Germ killing (99.9%) sanitizer launched during COVID pandemic
With fruit oil, natural extracts, vitamins for natural, radiant glow skin
Infused with botanical oils and natural extracts

Traction seen in Naturals category

With the entry of yoga guru Baba Ramdev’s Patanjali, the Naturals’ category surged in the marketplace as he advocated the use of natural, herbal
based products. This led to an adverse impact on the company as it was slow in responding with launches of natural/herbal/ayurvedic ingredient
based products. This led to loss of market share for CLGT from the highs of 57% in FY15 to 52% in FY19 (largely stable now with some gains
seen in Q4FY20). Today the Naturals/ Ayurvedic/Herbal toothpaste category forms nearly 25% of total toothpaste market in which CLGT is gaining
some traction as it is now clearly focused on new product launches with herbal/natural/ayurvedic ingredients under the leadership of Mr. Ram
Raghavan. CLGT’s Vedshakti toothpaste launch enabled it to bounce back in the naturals category we note. Going forward as indicated by
management strong traction could be seen in this segment. Recently, the company launched Colgate Charcol Black Toothpaste to differentiate its
offerings in the naturals category and has witnessed healthy traction here. In the black range (premium) the company has seen a 1% share in
Modern Trade (MT) in just 3 months of its launch, despite COVID-19 led challenges. It has also broadened the naturals category by launching
bamboo made and Neem/Charcoal fortified toothbrushes.

Exhibit 21: Naturals’ offerings from CLGT in toothpaste and toothbrush categories

Source: Company, Axis Securities

6
 Personal Care segment offers immense growth opportunities
The Indian Beauty and Personal Care (BPC) market is estimated to report a 9% CAGR to reach a size of US$ 23bn by FY22 from US$ 15bn in
FY17 driven by rising disposable incomes, demand for products with functional benefits and an increasing desire to look good thereby providing
the BPC market to grow at a rapid pace in India. Categories like cosmetics, fragrance & deodorants, men’s grooming and skin care are highly
under penetrated and expected to grow at 12% CAGR by FY22E. While, categories like bath & shower, hair care and oral care which is relatively
better penetrated are likely to see a slower growth than underpenetrated categories.
Herbal/Naturals segment is likely to report a 15% CAGR untill FY22 driven by growing consumers’ preference towards herbal/naturals segment
driven by its functional benefits and rising awareness among consumers towards ill-effects of using chemical based cosmetic products. CLGTs
journey in the personal care category started under the Palmolive brands’ offerings in the skin/personal care space. Sensing the huge opportunity
in the Indian BPC space, the company on periodic basis introduced products such are Palmolive Facial Bars (soaps), Palmolive Liquid Hand Wash
(hand wash), Palmolive Luminous Oils (body wash) a premium offering that has seen encouraging response from consumers. During COVID-19
lockdown, CLGT launched sanitizers under the Palmolive brand to address consumer’s needs for maintaining hygiene and cleanliness. We
believe, Colgate can now leverage its vast distribution network and a strong franchise to penetrate further and reach newer markets thus
expanding its revenues from the Personal Care segment (5% in FY20) going ahead.

Exhibit 22: Adoption of the global innovation pipeline Exhibit 23: Hand Sanitizer launched to capture COVID led opportunity

Source: Company, Axis Securities

Bolstering distribution across channels

Over the past 7 years, Colgate has boosted its distribution reach by ~3x and now reaches indirectly to over 6mn outlets and has over 350 cash
distributors across kirana, grocery stores, medical stores, wholesale and modern trade channels. Under ‘Mission Vistaar’ that was aimed at
increasing direct reach, CLGT’s number of outlets increased by 2.3x in 2018 on exit basis versus 2012. Wholesale distribution is an important
channel for Colgate and in North and East India, Colgate has higher dependence on this channel. While, in the near term this channel could come
under pressure due to pandemic led supply chain disruptions caused by labour unavailability, logistic issues etc, from a medium to long term
perspective it would be advantageous for Colgate as its portfolio has higher wholesale salience.

Exhibit 24: Direct distribution coverage expanded Exhibit 25: Colgate reaches out to 6mn outlets indirectly

2.3x

1.8x

2012 2017 2018

Source: Company, Axis Securities Source: Company, Axis Securities

Colgate Palmolive (India) has stepped up its presence in fast growing distribution channels of Modern Trade (MT) and e-commerce given the
incremental growth opportunities offered by these. Colgate’s market share in MT has increased by 160bps in Q1CY20 from Q1CY18 while that
in the e-commerce channel has risen by 200bps in Q1CY20 over Q1CY19. While MT channel got impacted in Q1FY21 due to lockdown, the e-
commerce channel has been reporting robust growth aided by shift of consumers purchasing online as frequency of trips out of home reduced.
Some of the recent launches like ProClinical electric toothbrush, Palmolive Luminous Oils and Palmolive Shower Gel/Body Wash were made
exclusively on e-commerce channel while other products like Kids’ Toothpastes, Charcoal Clean Black Gel etc are more attuned to MT channel.
Recognizing the huge growth potential through e-commerce platform, the company has set up an separate business team that will build a channel
specific product portfolio and leverage growth opportunities.

7
Exhibit 26: E-commerce share growing at robust pace Exhibit 27: Growing MT share yielding results as market share rises

7x 1.9x

x x

2016 2017 2018 2019 2014 2015 2016 2017 2018 2019

Source: Company, Axis Securities Source: Company, Axis Securities

Exhibit 28: Toothpaste portfolio straddles across price points and Exhibit 29: Toothbrush portfolio cater to consumers across different
offers functional benefits price points

Source: Company, Axis Securities Source: Company, Axis Securities

Leveraging technology to increase productivity

With the outbreak of COVID, the ways of doing business have undergone a transformation. We see technology to be a key enabler for conducting
business going forward that will augment sales and distribution effectiveness. Towards this, Colgate is leveraging technology and digitizing
processes. It has deployed mobile based apps that provide analytical data dashboards to its salesforce, generate customized store order,
recommendations, data modelling and enabling real time communication between its sales force and distributors thus empoweing them to take
appropriate decisions. Besides, this it has also launched Colgate Digi Order, a mobile app for retailers allows them to place contactless orders with
stockists. During the lockdown period ensuring product availability and delivery was of utmost importance, CLGT partnered with local logistic
vendors such as LoadShare, Lynk, Porter, Swiggy, Delhivery etc.

Exhibit 30: Adoption of technology to augment sales Exhibit 31: Ensuring availability during COVID led lockdown

Source: Company, Axis Securities Source: Company, Axis Securities

8
Focus on maintaining investments to support its brands
Given the current crisis, management believes that established brands with higher salience would benefit. CLGT has been working to improve its
brand connect and is developing a strong link with the ‘smile’ positioning. Several campaigns of optimism are being run around this with
engagement initiatives across the rural and urban markets and also on social media platforms. Management indicated that strong brand focus has
yielded positive results as noted in the household (HH) penetration and brand score rising by 300bps/160bps YoY. CLGT which operates in a
single product category of oral care has seen its absolute A&P spends rising as compared to some of its competitors. Also, its higher Gross
Margins gives it room for higher spends on ads which could thus drive share gains over and above the strong brands, better products and robust
reach. CLGT is a top recommended brand by dentists as highlighted by the management. CLGT’s A&P spends have consistently been ahead of
its peers in the category and under the new leadership we believe the company will continue to leverage its media spends thus driving volumes

Exhibit 32: A&P Spends Exhibit 33: In-Store branding activity

10.000 14,1 15
14,0 13,8 14,0
7.500 12,7 14
13,0 12,7

5.000 13

2.500 12

0 11
FY17 FY18 FY19 FY20 FY21E FY22E FY23E

A&P (Rs.cr) As % of Sales (RHS)

Source: Company, Axis Securities Source: Company, Axis Securities

Healthy Gross Margins to support ~200bps expansion in EBITDA Margin over FY20-23E
CLGT reported a 340bps expansion in Gross Margins over FY16-20 period aided by launch of premium products with higher margin profile. We
believe, the company has multiple levers to drive margin improvement over FY20-23E driven by 1) pricing power by virtue of its market leadershup
in both toothpastes and toothbrushes segment; 2) post COVID increasing preference of consumers for products that have health and hygiene
orientation like Natural’s segment, Charcoal deep clean, neem toohbrushes etc., 3) mix improvement (likely higher demand for large packs), 4)
benign RM prices (resisns, chemicals, corn, carton boards, palm oil and crude based packaging material), 5) cost rationalization measures ex-A&P
costs could drive over 200bps EBITDA Margin improvement over FY20-23E.

Exhibit 34: Steadily improving Margins

70

60 65,3 65,7 65,9

64,2 64,8 65,0
62,6
50

40
26,1 27,2 25,9 26,8 27,5 28,0
30 23,1

20

18,2 18,5 19,3 20,0

10 16,5 16,8
14,6
0
FY17 FY18 FY19 FY20 FY21E FY22E FY23E

Gross Margin (%) EBITDA Margin (%) PAT Margin (%)

Source: Company, Axis Securities

9
Steady improvement in FCF expected to be seen over FY20-23E
In FY19, Colgate had much lower capex and better sales growth as against the period FY16-18. This resulted in a FCF improvement in FY19 to
Rs. 844cr. However, in FY20 it was lower by 1.7% as pandemic induced country-wide lockdown in last week of March impacted sales. However,
benign capex requirements and efficient working capital management to result in a steady improvement in FCF over FY20-23E to Rs. 1,120cr.

Exhibit 35: FCF and Capex trends

1.200 1.126 1.120

1.000 844 830 863
800
600 485
367
400
200
-
(200)
(400)
FY17 FY18 FY19 FY20 FY21E FY22E FY23E

FCF (Rs.cr) Capex (Rs. cr)

Source: Company, Axis Securities

10
Valuations and Outlook
We initiate coverage on Colgate Palmolive (India) Ltd with BUY and Target Price of Rs. 1,565/share implying an upside of 15% as we
value the stock at 38x P/E its FY23E EPS (10 year average P/E of 42x) which is reasonable given the challenging conditions on-ground
caused by the pandemic spread. We believe, CLGT’s market leadership position in toothpastes, penetration led volume growth, healthy and
consistent margin profile, relative stability of its business model, strong parentage, step up in produce innovation and filling up white spaces,
healthy balance sheet with superior cash flow generation, strong return ratios and negative working capital are some of the key winning features a
long term perspective. Although, the near term is challenging, we like CLGT’s business orientation of ‘essential and stable’ across market
conditions and therefore initiate coverage with BUY rating.

Exhibit 36: 12M FWD PE CHART (x) Exhibit 37: 12M FWD PE BAND CHART

2400 53

2000 48

1600 43

1200 38

800 33

400 28
Dec-17

Dec-18

Dec-19
Sep-17

Sep-18

Sep-19

Sep-20
Mar-17

Mar-19

Mar-20
Mar-18

Dec-19
Sep-17

Dec-17

Dec-18

Sep-19

Sep-20
Jun-17

Jun-18

Jun-20

Sep-18
Jun-19

Mar-17

Mar-20
Mar-18

Mar-19
Jun-17

Jun-20
Jun-18

Jun-19
Price 30x 40x 50x 60x Mean Mean+1Stdev Mean-1Stdev PE

Source: Company, Axis Securities

Exhibit 38: 12M FWD EV/EBITDA BAND Exhibit 39: Colgate Palmolive (India) Stock Returns vs P/E

Time CLGT Stock

40 Period (P/E) Returns (%)
35
1 year 48.2x 9.1%
30

25 3 year 47.6x 5.6%

20
5 year 46.5x 8.3%
15
Jun-18

Jun-19

Jun-20
Jul-17
May-17

Feb-18

Feb-19

Feb-20
Mar-17

Oct-17

Apr-18

Oct-18

Oct-19

Apr-20
Apr-19
Aug-18

Aug-19

Aug-20
Dec-17

Dec-18

Dec-19

7 year 45.2x 12.1%

Mean Mean+1Stdev Mean-1Stdev EV/EBITA 10 year 41.9x 12.7%

Source: Company, Axis Securities

11
Key Risks

Sharp increase in competitive intensity and loss of market share

In the past few quarter the company’s market shares have stabilized at 52% after having seen a sharp decline from 57% in FY15 owing to
aggressive competition from Patanjali’s Dant Kanti. Though it has stabilized and However, a sharp rise in competitive intensity leading to market
share loss could be a key downside risk to our estimates. Although competitive forces remain bening, it continues to be a key monitorable.

Input cost inflation

Key RMs for Colgate Palmolive (India) are Resins, Chemicals, Palm Oils, carton boards and corn. Currently prices of its key RMs remain benign
any sharp increase in these RMs could have a significant impact on its overall operating profitability. Any volatility in currency (depreciation of
INR) could increase cost of imported chemicals thus affecting profitability.

Failure of new product launches and weaker demand traction

Weak demand traction for its products from rural areas which have been the growth driver for most staple companies during COVID-19 period
could imapct volume growth for CLGT and thus affect overall financial performance. Further as CLGT intends to maintain it’s A&P spends based
on market conditions to support its brands, any failure of its new product launches across segments could have an impact on its operating
profitability.

About the company

Colgate-Palmolive (India) Limited (CLGT) is a leader with market share of over 50% in the Indian toothpaste market which has a size of over Rs.
100 billion. About 97% of the company’s sales comes from the oral care products category. Company’s product range includes toothpastes,
toothpowder, mouthwash, toothbrushes and dental gel under the “Colgate” brand. Under the personal care products segment it offers a range of
shower gels and liquid hand washes under brand “Palmolive”. CLGT has the widest distribution network in the toothpaste category as it reaches
out to almost 6.1 million outlets across the country.

Manufacturing footprint

Source: Company, Axis Securities

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Financials (Standalone)
Profit & Loss (Rs Cr)
Y/E Dec FY20 FY21E FY22E FY23E
Net sales 4,488 4,663 5,082 5,619
Growth, % 1.2 3.9 9.0 10.6
Other income 38 39 43 47
Total income 4,525 4,701 5,125 5,666
Raw material expenses (1,573) (1,620) (1,742) (1,916)
Employee expenses (332) (347) (383) (423)
Other Operating expenses (1,418) (1,444) (1,559) (1,705)
EBITDA 1,202 1,291 1,441 1,623
Growth, % -2.8 7.4 11.6 12.6
Margin, % 26.8 27.7 28.3 28.9
Depreciation (198) (184) (181) (180)
EBIT 1,004 1,107 1,260 1,443
Growth, % -6.8 10.3 13.8 14.6
Margin, % 22.4 23.7 24.8 25.7
Interest paid (10) (10) (10) (10)
Other Non-Operating Income 49 55 61 67
Pre-tax profit 1,043 1,152 1,310 1,500
Tax provided (227) (290) (330) (378)
Net Profit 816 862 980 1,122
Growth, % 9.6 5.6 13.7 14.4
Net Profit (adjusted) 816 862 980 1,122
Unadj. shares (cr) 27 27 27 27
Source: Company, Axis Securities

Balance Sheet (Rs Cr)

As at 31st Dec FY20 FY21E FY22E FY23E
Cash & bank 421 412 605 732
Debtors 133 239 236 266
Inventory 297 298 303 337
Loans & advances 422 438 478 528
Total current assets 1,278 1,392 1,628 1,868
Investments 19 19 19 19
Net fixed assets 1,313 1,199 1,098 1,019
Total assets 2,604 2,605 2,739 2,900

Current liabilities 1,005 1,062 1,199 1,288

Total current liabilities 1,005 1,062 1,199 1,288
Total liabilities 1,010 1,067 1,204 1,293
Paid-up capital 27 27 27 27
Reserves & surplus 1,567 1,511 1,507 1,580
Shareholders’ equity 1,594 1,538 1,534 1,607
Total equity & liabilities 2,604 2,605 2,739 2,900
Source: Company, Axis Securities

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Cash Flow (Rs Cr)
Y/E Dec, Rs. Cr FY20 FY21E FY22E FY23E
Pre-tax profit 1,043 1,152 1,310 1,500
Depreciation 198 184 181 180
Chg in working capital -111 -67 95 -25
Total tax paid -253 -290 -330 -378
Cash flow from operating activities 877 979 1,256 1,276
Capital expenditure -121 -70 -80 -100
Chg in investments 13 0 0 0
Cash flow from investing activities -109 -70 -80 -100
Free cash flow 769 909 1,176 1,176
Equity raised/(repaid) -4 0 0 0
Dividend (incl. tax) -656 -918 -984 -1,049
Cash flow from financing activities -738 -918 -984 -1,049
Net chg in cash 31 -9 193 127
Opening cash balance 399 421 412 605
Closing cash balance 421 412 605 732
Source: Company, Axis Securities

Ratio Analysis (%)

FY20 FY21E FY22E FY23E
Per Share data
EPS (INR) 30.0 31.7 36.0 41.2
Growth, % 9.6 5.6 13.7 14.4
Book NAV/share (INR) 58.6 56.5 56.4 59.1
FDEPS (INR) 30.0 31.7 36.0 41.2
CEPS (INR) 37.3 38.4 42.7 47.8
CFPS (INR) 30.4 34.0 44.0 44.5
DPS (INR) 20.0 28.0 30.0 32.0
Return ratios
Return on assets (%) 31.4 33.3 36.9 40.0
Return on equity (%) 51.2 56.0 63.9 69.8
Return on capital employed (%) 52.1 55.2 64.0 71.6
Turnover ratios
Asset turnover (x) 3.9 4.1 5.0 6.3
Sales/Total assets (x) 1.7 1.8 1.9 2.0
Sales/Net FA (x) 3.3 3.7 4.4 5.3
Receivable days 10.8 18.7 17.0 17.3
Inventory days 24.2 23.3 21.8 21.9
Payable days 67.3 67.4 71.8 69.1
Liquidity ratios
Current ratio (x) 1.3 1.3 1.4 1.5
Quick ratio (x) 1.0 1.0 1.1 1.2
Interest cover (x) 104.4 112.9 125.9 141.4
Dividend cover (x) 1.5 1.1 1.2 1.3
Net debt/Equity (%) (26.4) (26.8) (39.4) (45.5)
Valuation
PER (x) 45.4 43.0 37.8 33.1
Price/Book (x) 23.3 24.1 24.2 23.1
Yield (%) 1.5 2.1 2.2 2.3
EV/Net sales (x) 8.2 7.9 7.2 6.5
EV/EBITDA (x) 31.5 29.3 26.1 23.1
EV/EBIT (x) 37.9 34.3 30.0 26.0
Source: Company, Axis Securities

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About the analyst

Analyst: Suvarna Joshi

Contact Details: suvarna.joshi@axissecurites.in

Sector: FMCG, Consumption sector, Mid-Caps

Analyst Bio: Suvarna Joshi is MBA (Finance) from Mumbai University with about 10 years of experience in
Equity market and research

Disclosures:

The following Disclosures are being made in compliance with the SEBI Research Analyst Regulations 2014 (herein after referred to as the Regulations).
1. Axis Securities Ltd. (ASL) is a SEBI Registered Research Analyst having registration no. INH000000297. ASL, the Research Entity (RE) as defined in the
Regulations, is engaged in the business of providing Stock broking services, Depository participant services & distribution of various financial products. ASL is a
subsidiary company of Axis Bank Ltd. Axis Bank Ltd. is a listed public company and one of India’s largest private sector bank and has its various subsidiaries
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3. ASL has no material adverse disciplinary history as on the date of publication of this report.
4. I/We, Suvarna Joshi, PGDBM - (Finance), author/s and the name/s subscribed to this report, hereby certify that all of the views expressed in this research report
accurately reflect my/our views about the subject issuer(s) or securities. I/We (Research Analyst) also certify that no part of my/our compensation was, is, or will
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 DEFINITION OF RATINGS

Ratings Expected absolute returns over 12-18 months

BUY More than 10%

HOLD Between 10% and -10%

SELL Less than -10%

NOT RATED We have forward looking estimates for the stock but we refrain from assigning valuation and recommendation

UNDER REVIEW We will revisit our recommendation, valuation and estimates on the stock following recent events

NO STANCE We do not have any forward looking estimates, valuation or recommendation for the stock

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