Buy This Large Cap FMCG Stock With A Target Price of Rs. 1736: HDFC Securities

In the midst of the markets volatility, the fast-moving consumer goods (FMCG) sector has received greater traction, since the Nifty FMCG index has witnessed more corrections, and market price corrections for strong bull markets may be appealing to equity investors. A renowned brokerage company, HDFC Securities Ltd, has recommended buying the shares of Colgate-Palmolive (India) Ltd with a target price of Rs. 1736, citing excellent risk-reward potential. The brokerage expects the stock to grow roughly 20% in the next six months from its current market price of Rs. 1445. The brokerage has noted that In Q2FY22, CPILs net revenue grew by 5% YoY (+5% in Q2FY21 and +12% in Q1FY22) with volume growth of ~2% (+3% in Q2FY21, +8% in Q1FY22). Its go-to-market approach continues to see the adoption of new business models and approaches as it expands its brands across different platforms. The freshness and base segments saw a good growth trajectory. While the premium launches are performing well, the company sees this segment growing in the long run but does not expect benefits to be visible in the short to medium term. HDFC Securities has stated that Overall penetration trends remain strong and are favourable quarter on quarter. Gross margin contracted by 130/232bps YoY/QoQ to 67%, after expanding for the past four quarters. While the company took price hikes at the end of the quarter, its impact was not visible. A&P grew by 13/16% YoY/QoQ in Q2FY21, while employee/other expenses were up 8/4%. EBITDA margin contracted by 221bps YoY to 29.6% (+541bps in Q2FY21, +87bps in Q1FY22).Advertisement In its research report, the brokerage has claimed that Colgate-Palmolive (India) Ltd. (CPIL) has dominated the oral hygiene market in such a way that the brand has become synonymous with toothpaste. Introduced in 1937 in India, it is single-handedly responsible for getting Indians to abandon neem twigs for toothbrushes. The strong relationship and the trust of generations of consumers, trade and the dental profession have been built over decades of operations in India. The brand has faced bursts of competition from time to time and has fought back effectively to regain market share. In the recent past Patanjali challenged the status quo of Colgate with its Ayurveda-based offerings, Colgate responded by introducing Vedshakti portfolio of herbal and ayurvedic variants which has been witnessing increased traction in recent quarters. HDFC Securities has further said that While it enjoys a near-monopolistic status in its core segment, in recent past, it has been increasingly focused on developing various subsegments including herbal based products, products for diabetics, mouth sprays, oil pulling, instant teeth whitening, etc. Even the toothbrush portfolio has seen some additions including the gentle and natural brushes. Looking at the opportunities under each subsegment, exciting product launches and the demographic size, we are optimistic about the companys growth. According to the brokerages analysis CPILs performance over last decade is a story of contrast. While its revenues grew at a staggering 15% CAGR over FY10-15, it could barely manage ~3% CAGR growth over FY15-20 affected by the tepid macroeconomic environment (demonetisation, GST, low rural demand) and heightening competition (particularly from Patanjali). It saw its market share eroding from the peak of 57% in FY15 to 48% being caught off guard with the unprecedented rise in demand for natural products. However, the market share now seems to have stabilised. HDFC Securities has commented that Mr. Ram Raghavan, the MD of CPIL appointed in July 2019 had developed a formulaic approach to recoup the market share loss which seems to be proving fairly successful. The company today is not just focused on launching new products in existing categories, it is rather redefining oral health by developing new categories. Some of the recent launches like Colgate toothpaste for diabetics, Colgate Vedshakti mouth spray, and Colgate Vedshakti Oil Pulling are expanding the market for the company. The company recently launched the Colgate Magik toothbrush, the first augmented reality toothbrush (for kids). The company was earlier concentrating on gaining share in naturals/ayurvedic toothpaste where competition is very tough. But the renewed focus on innovative launches, which are potentially sizable categories, continues to inspire us. By staying bullish on the stock, the brokerage has claimed that While toothpaste is highly penetrated, the growth opportunity in oral care is still attractive driven rising per capita consumption, premiumisation and category expansion. We are confident of CPIL regaining most of the lost market share given its track record of beating the competition, best-in-class product portfolio, unparalleled reach and unwavering focus on oral care. If CPILs performances in recent quarters are anything to go by, it has seen market share gain though gradually. We have built-in a modest revenue growth of ~8% CAGR over FY21-24E with new launches (2-3% as of now) expected to drive the growth. Any positive surprise on the volume growth front and resulting market share gains could lead to the re-rating of the stock. We feel investors can buy the stock in Rs. 1432-1446 band (32x SeptFY23E EPS) and add more on dips to Rs 1275 (29x SeptFY23E EPS) for the base case value of Rs.1604 (36.5x SeptFY23E EPS) and bull case fair value of Rs.1736 (39.5x SeptFY23E EPS). The stock has been picked from the brokerage report of HDFC Securities Limited. Investing in equities poses a risk of financial losses. Investors must therefore exercise due caution. Greynium Information Technologies, the author, and the brokerage house are not liable for any losses caused as a result of decisions based on the article.