Kotak Securities has recommended a reduce rating on Colgate Palmolive (India), in its April 2014 report.
long-term revenue growth has been enabled by rising penetration and strengthening market shares of the company. We believe, judging by the pricing changes and changes in advertising and promotional spends of the company, that competitive pressures in the oral care category have been contained in the past few years. This has enabled strong margin expansion, further enhancing earnings growth. Recent years' (FY13/FY14) financials indicate rising competitive intentity (entry of 'Oral-B'), and the investment case for Colgate depends on how sustainable these competitive pressures could be. It is our opinion that: 1/ given high dependence on the category, Colgate is unlikely to drop entry barriers (prompted by launch of Oral-B) in the near-term - this implies earnings growth should be soft, and 2/ if Oral - B were to meet with success in improving its market share, the earnings estimates for Colgate could prove to be optimistic. In this context, valuations of Colgate (31.4x PER FY16E), which suggest a blue-sky scenario, are stretched beyond our comfort. We initiate on Colgate with a REDUCE rating (PT: Rs 1337).
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