Colgate Palmolive (CLGT IN) Rating: REDUCE | CMP: Rs1,275 | TP: Rs1,159 September 3, 2019 Downgrade to reduce on poor growth visibility Company Update Quick Pointers: ☑ Change in Estimates | ☑ Target | ☑ Reco . 1Q20 toothpaste exit market share at 10-year low with 1.3% tonnage growth Change in Estimates . Revival looks tough as naturals drive category growth (Colgate’s weakness) Current Previous FY20E FY21E FY20E FY21E . Palmolive Facial bars unlikely to scale up given niche positioning and high price Rating REDUCE HOLD Target Price 1,159 1,208 Sales (Rs. m) 47,712 52,036 48,069 52,617 We downgrade Colgate Palmolive from Hold to Reduce and cut EPS estimates % Chng. (0.7) (1.1) of FY20-21 by 0.9-1.3% given 1) 10- year low 1Q20 exit market share 2) 1Q EBITDA (Rs. m) 13,931 15,113 14,039 15,286 % Chng. (0.8) (1.1) tonnage volume growth of just 1.3% and 3) slowdown in toothpaste segment EPS (Rs.) 29.1 32.4 29.4 32.9 except naturals. However, Colgate is making a push for volumes led by 1) % Chng. (0.9) (1.3) 30% increase in direct distribution 2) bringing family pack prices of Total closer to CDC and 3) more offers in bundled packs. Instead of being more Key Financials - Standalone aggressive for volume growth and market share expansion, Colgate has Y/e Mar FY18 FY19 FY20E FY21E taken 6-8% price increase post GST and operates at lifetime high margins. We Sales (Rs. m) 41,880 44,624 47,712 52,036 EBITDA (Rs. m) 11,124 12,361 13,931 15,113 believe Colgate’s intent to achieve 6-7% volume growth looks difficult given Margin (%) 26.6 27.7 29.2 29.0 its weak positioning in high growth naturals segment and intense competition PAT (Rs. m) 6,595 7,164 7,914 8,824 from Dabur, Patanjali and other players in the naturals segment. EPS (Rs.) 24.2 26.3 29.1 32.4 Gr. (%) 14.2 8.6 10.5 11.5 DPS (Rs.) 13.0 15.0 20.0 25.0 Although Colgate is indicating intent to grow personal care business (5% of Yield (%) 1.0 1.2 1.6 2.0 sales), its focus on niche premium segments (hand and body wash and now RoE (%) 47.1 48.2 52.1 59.3 Palmolive Facial bars) remains a hurdle. We believe CLGT will continue to RoCE (%) 68.3 72.4 78.1 88.6 EV/Sales (x) 8.2 7.7 7.2 6.6 trade at a discount to peers due to single category dependence and sustained EV/EBITDA (x) 30.8 27.8 24.5 22.7 loss of share in key category. We value the stock at 35xJune21 EPS (36x PE (x) 52.6 48.4 43.8 39.3 P/BV (x) 22.7 23.9 21.8 24.9 earlier) and cut target price to Rs1160 (Rs1208 earlier). Downgrade to Reduce. Toothpaste market share ~10-year low at sub 50%: Colgate’s exit market Key Data COLG.BO | CLGT IN share in 1Q20 has dipped below 50%, a 10-year low. Given ~88% category 52-W High / Low Rs.1,356 / Rs.1,011 penetration and Colgate’s dominant market share, sustained market share gain Sensex / Nifty 37,333 / 11,023 Market Cap Rs.347bn/ $ 4,844m is key to achieving reasonable growth. Although CLGT has seen reasonable Shares Outstanding 272m success in Swarna Vedshakti, it has not been able to neutralize the market 3M Avg. Daily Value Rs.1070.32m share loss in Total and Sensitive. Given weak position of Colgate in naturals segment (15% growth), gaining back market share looks difficult. Shareholding Pattern (%) Promoter’s 51.00 . Oral Care: Slew of measures to revive growth: Colgate has taken several Foreign 15.37 Domestic Institution 10.18 measures to revive volume growth which include 1) 30% increase in direct Public & Others 23.45 distribution in FY19 and similar increase expected in FY20 2) reduction in pack Promoter Pledge (Rs bn) - size of Total to bring outgo in line with other brands like CDC and Active Salt 3) increased for bundled packs in CDC, Total and Swarna Vedshakti and 4) Stock Performance (%) gradual increase in pack size of LUP’s. Despite poor volumes and competitive 1M 6M 12M Absolute 9.1 2.1 11.3 intensity, all time high margins and 6-8% price increase suggest margin centric Relative 9.2 (1.9) 15.3 approach of the company. Amnish Aggarwal . Personal care remains a pipe dream: Although Colgate has identified [email protected] | 91-22-66322233 Personal care as a key focus area, its focus on premium products in niche Nishita Doshi categories remains an issue. We believe launch of Palmolive facial bars at [email protected] | 91-22-66322381 Rs60/75gm is unlikely to compete as it competes with Dove, Fiama Di wills and host of other premium products. We believe that current pace of launches and strategy is unlikely to scale up the personal care business in medium term. September 3, 2019 1 Colgate Palmolive Oral Care: Will the Volume push work? Given that oral care is more than 95% of sales for Colgate, growth in this category is imperative for company growth. This is more so as Colgate is operating at lifetime high gross and EBIDTA margins of 65.1% and 27.7%. Colgate has initiated several steps to push growth rates in toothpaste segment: 30% increase in direct coverage in 2018 CLGT has been steadily increasing its distribution reach. Post demonetization and GST, the wholesale channel has come under severe pressure due to regulatory and liquidity concerns. Colgate has renewed its efforts to bolster its distribution by 1) increasing direct coverage by 30% in CY18 and is targeting another 30% increase in CY19 2) it has increased indirect reach from 5mn outlets to 6mn in past two years. We believe reduced reliance on wholesale channel is long term positive as CLGT tends to be at a disadvantage in comparison to peers given limited width of its product portfolio. Direct reach will enable the company to place better assortments in the trade channel and improve penetration of premium products. Colgate plans to increase direct coverage by 1.3xCY18 in 2019 Direct reach indexed to CY12 350 299 300 250 230 200 180 150 100 100 50 0 CY12 CY17 CY18 CY19 Source: Company, PL Rejig in Grammage and pricing strategy Colgate has been on the receiving end with loss of more than 800bps market share since naturals wave picked up (led by Patanjali and Dabur). Past few years have seen naturals segment growing in high double digits even as other segments in toothpaste have suffered. Colgate has now devised a multi-pronged strategy to push for volumes in the toothpaste segment. Premiumisation back on track: Naturals segment growth has softened to ~15%, although it is still growing far ahead of the category. After a gap of 4 years premium multi benefit segment (Total and Sensitive) is showing some signs of revival and consumer interest. Colgate is well placed to capitalize on the same given strong brands and value added variants in the segment. September 3, 2019 2 Colgate Palmolive . Improving affordability with smaller pack sizes: Colgate has launched smaller packs of premium brands like Total and Sensitive to increase their affordability. Colgate reduced the pack size of Total from 150gm to 140gms and now to 120gms, to bring the MRP (Rs92) below Rs100 and is in line with the pricing of 200gms of family packs of Colgate Dental cream and Active salt. This will enable the company enable sift from mass segment family toothpaste to premium offering like Total which has been on the receiving end due to pick up in the Naturals segment. Volume push with bundled packs: Colgate has increased consumer discounts and offerings to push volumes through offers like 1+1 or a free smaller SKU or free toothbrush. Our channel checks suggest that the shelf space occupied by all the major brands was maximum for bundled packs. CDC is giving 100gm free on bundled pack of two tubes of 200gm each. Colgate Total has 2 packs of 120gms each and 1 pack of 65gms free. Swarna Vedshakti is giving Rs17 off on two packs of 200gm each. Bundled packs occupy the highest shelf space Source: Company, PL . LUP’s are becoming bigger: Even as Colgate has made bigger pack sizes smaller in a few brands like Total, it is gradually increasing the size of low unit packs. Rs5 pack of CDC has been gradually phased out and replaced by Rs10 pack. The company is toying with the idea of shifting the LUP price point to Rs15-20 over a period of time. The larger sized LUP’s will push volume growth higher and also induce brushing habit amongst people. September 3, 2019 3 Colgate Palmolive Toothpaste segment hit on various fronts Colgate market share at ~10-year low, touches sub 50% levels Colgate Palmolive closed 1QFY20 with sub 50% volume market share in toothpaste, lowest since 3QFY09 (49.6%) with value share being 20/30bps lower than volume share. Colgate has thus lost ~800bps of volume share in toothpaste (peak of 57.9% in 1HCY15) post shift to naturals segment led by Patanjali and Dabur. Although Colgate’s efforts and innovations curtailed the speed of decline in 2H18, it is far away from gaining back lost share (June 19 YTD Market share declined 20bps QoQ). Colgate has lost ~800bps of market share in past 4 years 60 57.9 57.8 57.6 57.3 58 56.7 55.9 55.7 55.7 55.3 55.1 56 54.7 54 53.7 54 53.4 52.5 52.5 52.4 52 52 50 50 48 46 Toothpaste Volume Share (%) Share Volume Toothpaste Apr- Dec 18 Dec Apr- Jan - Apr 15 - Apr Jan Jan - Apr 16 - Apr Jan Jan - Apr 17 - Apr Jan Jan - Mar 18 - Mar Jan Apr- Sept 18 Sept Apr- Jan - Dec 14 - Dec Jan Jan - Sep 15 - Sep Jan Jan - Dec 15 - Dec Jan Jan - Dec 16 - Dec Jan Jan - Aug 17 - Aug Jan Jan - Dec 17 - Dec Jan Jan - Sept 16 - Sept Jan Jan - June 15 - June Jan Jan - June 16 - June Jan Jan - June 17 - June Jan Jan - June 18 - June Jan Jan - June 19 - June Jan Apr- March 19 March Apr- Source: Company, PL Aggressive competition pushes Colgate’s share below 50% Colgate Dabur HUL Patanjali 60 56.8 57.2 50 54.5 56.1 55.5 52.2 53.3 52.7 53.6 52.4 48.8 49.4 50 40 25.1 30 24.6 22.8 22.6 23.3 23.5 22.8 21.7 19.8 19.2 17.7 17.3 18 20 14 15.3 15.4 15.1 15 10 14.8 14 13.4 13.4 11.9 12.2 12.9 13.7 0.1 0.4 0.6 1.2 2.9 6.8 8.6 8.6 Toothpaste Volume share % share Volume Toothpaste 0 YTD CY07 CY08 CY09 CY10 CY11 CY12 CY13 CY14 CY15 CY16 CY17 CY18 Source: Company, PL .