Broker's call: Colgate-Palmolive (Reduce)

CMP: ₹1,248.75

Target: ₹1,160

We downgrade Colgate Palmolive from Hold to REDUCE and cut EPS estimates of FY20-21 by 0.9-1.3 per cent given 1) 10-year low 1Q20 exit market share’ 2) 1Q tonnage volume growth of just 1.3 per cent; and 3) slowdown in toothpaste segment except naturals. However, Colgate is making a push for volumes led by 1) 30 per cent 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 aggressive for volume growth and market share expansion, Colgate has taken 6-8 per cent price increase post GST and operates at lifetime high margins. We believe Colgate’s intent to achieve 6-7 per cent volume growth looks difficult given its weak positioning in high growth naturals segment and intense competition from Dabur, Patanjali and other players in the naturals segment.

Although Colgate is indicating intent to grow personal care business (5 per cent of sales), its focus on niche premium segments (hand and body wash and now Palmolive Facial bars) remains a hurdle.

We believe Colgate will continue to trade at a discount to peers due to single category dependence and sustained loss of share in key category. We value the stock at 35xJune21 EPS (36x earlier) and cut target price to ₹1,160 (₹1,208 earlier). Downgrade to REDUCE.