Colgate-Palmolive India Ltd. shares fell more than 2 per cent on Tuesday as investors got nervous reading from investors who have long seen the company’s stocks as a front-line player who can be beaten. Goldman Sachs and Citi maintained the ‘Sell’ rating, calling for near-term margins to be improved and sales to be strong.
Colgate-Palmolive shares fell as much as 2.63% to ₹1,913.20 each on BSE. At 9:24 am, the stock was 2.22% lower at ₹1,921.40, and the Sensex was down 0.29% to 77,505.
The weakness in the stock is the result of analysts assessing the strategy by which the company is investing in growth rather than margin expansion.
Goldman Sachs is still Sell
Goldman Sachs maintained its Sell recommendation on Colgate-Palmolive and set a target price of ₹2,050 per share.
The brokerage expects the company’s sales growth to be supported by two main factors: premiumisation and higher consumption.
Premiumisation refers to the changing consumer trend towards higher-priced or higher-value products. Colgate is well aware of the significance of this and will continue to develop its premium oral-care line with product innovation as part of its growth strategy.
Goldman Sachs believes premiumisation will continue to be the company’s most important growth driver.
But the brokerage highlighted an immediate near-term problem. Colgate is focusing on innovation and advertising investments, and that would put pressure on profitability even as sales continue to rise.
Goldman Sachs expects the company to largely maintain its gross margins, but higher advertising and marketing expenditure might be to the detriment of EBITDA margins in the near term.
The brokerage also pointed out that there is limited visibility as to how significant portfolio expansion beyond the core toothpaste business could be.
Citi also maintains Sell
Citi also retains its Sell rating on Colgate-Palmolive with a target price of ₹2,000.
The brokerage said Colgate has much room to increase oral-care consumption in India.
Citi believes that growth will gradually be more balanced between volume growth, pricing, and product mix.
More affordable product availability could help make oral care products more popular, and therefore open a long-term growth opportunity for the company.
But Citi thinks Colgate is currently focused on growth and not just near-term margin growth.
The brokerage still sees premiumisation as the key driver of the company’s growth, the brokerage says.
JPMorgan remains Neutral
On the other hand, JPMorgan maintained its Neutral rating on Colgate-Palmolive at a target price of ₹2,250.
JPMorgan also highlighted premiumisation as the company's biggest growth lever.
But in the near term, the brokerage says it expects the company to put growth investments ahead of margin growth.
So profitability might be temporarily down as Colgate increases spending to support brand building, advertising, innovation and premium products.
The different target prices from the brokerages reflect different views of Colgate's growth potential and near-term profitability.
Brokerage view on Colgate
Brokerage Rating Target Price
Goldman Sachs Sell ₹2,050
Citi Sell ₹2,000
JPMorgan Neutral ₹2,250
Premiumisation is still a major growth strategy
Colgate's growth strategy is increasingly centred around premiumisation.
The company is looking to push consumers toward premium oral-care products (or, at least, more premium oral-care products and, therefore, to increase overall consumption.
This strategy will provide the company with two more possible growth avenues: higher revenue from premium products and increased consumption of oral-care products.
But the strategy is an investment in advertising, marketing, and innovation.
That creates a short-term trade-off between revenue growth and profitability.
If investments translate into higher volumes and a higher volume of premium product adoption, margins would be better for the long run. But in the short term, higher expenditure could put profitability under pressure.
What investors should watch
Colgate investors will be asking whether the company's increased spending will lead to sustainable revenue growth and volume growth as well.
Investors will follow the trend of volume growth, premium-product sales, advertising expenditure, EBITDA margins and overall consumption in the quarters to come.
The stock’s early fall in value signals that the market is more concerned with near-term profitability risk than the company’s long-term growth prospects.
Goldman Sachs and Citi’s Sell ratings further underscore the risk of the stock to be able to generate little upside if margin expansion is not robust enough.
At the same time, JPMorgan's Neutral stance indicates that analysts still see the company as a company with upside but are concerned about valuation and near-term earnings visibility.
On the surface, Colgate’s investment story seems to be largely about the tradeoff between growth and profitability at this point in time.
Comments
Please to leave a comment on this article.