The oral care segment will likely remain a profitable but a competitive segment over the next 3-5 years, says Nomura Equity Research
Colgate Palmolive (India) is the dominant market leader in the oral care segment in India. Category growth is still attractive and profitable, and it is expected that the company holds its market share and deliver stable earnings growth over the next couple of years, says Nomura Equity Research in its report on Colgate Palmolive.
According to Nomura analysts, “While we expect Colgate Palmolive to continue to deliver stable earnings growth, we believe current valuations build in a significant premium versus the long-term average.”
Positive catalysts for the share could come if the company is able to gain significant a market share in the toothpaste segment. The oral care segment will likely remain profitable but a competitive segment over the next 3-5 years. Downside risk could come from disruptive competition from other players, which could force Colgate Palmolive to increase its A&P (advertising and promotion) spend. However, the company has already demonstrated its ability to face heightened competition, and Nomura is confident about the company’s ability to maintain this over the medium term.
The strong market share performance has not been at the expense of margins. Although Colgate Palmolive spends a significant level of money on A&P, over the past five years it has only grown in line with the sales CAGR (compounded annual growth rate). This has been the most impressive growth recorded by the company, and has surprised positively.
Colgate Palmolive trades at 25.6x FY15F EPS (earnings per share). The stable and attractive nature of the business has already been captured in the current premium valuation versus the sector. Nomura has upgraded the stock to Neutral, but it believes that valuations leave only limited upside potential from current levels.
Over the past year, Colgate Palmolive has seen a significant re-rating, partly driven by the open offer made by GlaxoSmithKline Plc for its listed Indian subsidiary GlaxoSmithKline Consumer Healthcare for which the parent increased its stake from 43.16% to 72.46%. Colgate Palmolive’s current valuation may be building in the possibility of a similar open offer from parent company Colgate. However, Nomura analysts consider such an offer unlikely.
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