Despite the onslaught of competition over the last five years – HUL, Dabur, Amar and now private labels – Colgate brand remains a “generic” to oral care in India.
It continues to dominate the oral care segment with a market share of 46.4% – toothpaste 50.2%, toothpowder 45.8%, and toothbrush 37%.
Colgate’s toothpaste sales have grown ~20% faster than the overall market over CY05-08 at 16.6%, while its growth in the toothbrush category has been almost 1.5x that of the total market.
Toothpaste penetration in India has risen to 57% in 2008 from 40% in 2000. However, the per capita consumption at 108 gms/year is still less than half of that of China (255 gms/year) and Malaysia (293 gms/year).
This, coupled with uptrading from toothpowder, gives us confidence that Colgate will be able to sustain its growth momentum.
Zero debt, no capital issuances in the last 15 years, RoCE and RoE in excess of 150% - underline the company’s financial strength. This should enable Colgate to compete fiercely for its turf in oral care, and also allow the company to grow its presence in personal care through brands like Palmolive and Halo.
We expect 14% CAGR in revenue and 18% CAGR in earnings over FY09-11.
While Colgate offers comfort in revenue and earnings visibility, most peers such as HUL (falling market share), ITC (rising excise burden), Dabur and Marico (leveraged and lower RoE) do not. Hence we expect Colgate to atleast retain, if not expand, its valuation premium.
We have assigned 5-year average P/E of 22x to FY11E EPS of Rs29.7 to arrive at P/E based value of Rs653. Our DCF value (10% WACC; 3% terminal growth) of Rs715 implies 14.4% upside potential. BUY.