JP Morgan maintains ‘Neutral’ rating on Colgate Palmolive
JP Morgan maintains ‘Neutral’ rating on Colgate Palmolive. Colgate is witnessing double-digit volume growth in the toothpaste category.
By ET Bureau |
RESEARCH: JP MORGAN
RATING: NEUTRAL
CMP: RS 698
JP Morgan maintains ‘Neutral’ rating on Colgate Palmolive. Colgate is witnessing double-digit volume growth in the toothpaste category. Rural sales are growing 200-250 bps ahead of urban sales and there has been no visible adverse impact of the poor monsoon yet.
While high food inflation could be a risk if its sustains for long, relative to other FMCG categories, spends on toothpaste will be less affected due to the lack of alternatives in this space. Colgate has been conservative in its pricing strategy and is likely to continue with the same. Colgate’s raw material index is up 5-6 % y-o-y and on a sequential basis sorbitol prices could face inflationary risks going forward.
While higher growth of low-priced toothpastes may impact gross margin performance, EBITDA margins are unlikely to be affected much considering relatively lower marketing spends for low-price brands. Other expenses will likely remain stable as much of the investments in IT and R&D infrastructure are behind us. JP Morgan expects robust volume growth momentum and favourable operating margin trends for Colgate in the coming quarters . However, higher income tax rates would lead to a 7% EPS growth in FY11E. Valuations at 24x FY10E and 23x FY11E P/E offer limited room for upside from current levels.
RATING: NEUTRAL
CMP: RS 698
JP Morgan maintains ‘Neutral’ rating on Colgate Palmolive. Colgate is witnessing double-digit volume growth in the toothpaste category. Rural sales are growing 200-250 bps ahead of urban sales and there has been no visible adverse impact of the poor monsoon yet.
While high food inflation could be a risk if its sustains for long, relative to other FMCG categories, spends on toothpaste will be less affected due to the lack of alternatives in this space. Colgate has been conservative in its pricing strategy and is likely to continue with the same. Colgate’s raw material index is up 5-6 % y-o-y and on a sequential basis sorbitol prices could face inflationary risks going forward.
While higher growth of low-priced toothpastes may impact gross margin performance, EBITDA margins are unlikely to be affected much considering relatively lower marketing spends for low-price brands. Other expenses will likely remain stable as much of the investments in IT and R&D infrastructure are behind us. JP Morgan expects robust volume growth momentum and favourable operating margin trends for Colgate in the coming quarters . However, higher income tax rates would lead to a 7% EPS growth in FY11E. Valuations at 24x FY10E and 23x FY11E P/E offer limited room for upside from current levels.
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