Stock Recommendations – June 2021

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Colgate-Palmolive (India) Ltd. manufactures consumer products in the oral care and body care area. The company’s products include soaps, cosmetics, toilet preparations, toothpaste, toothbrushes, shaving brushes and glycerine. Colgate-Palmolive (India) today has one of the widest distribution networks in India that makes Colgate available in almost 6.28 plus million retail outlets across the country. The company leads the ₹10,500 crore plus Indian toothpaste market.

Standalone revenue rose 4.1% QoQ to Rs. 1,275cr (+20.0% YoY) in Q4FY21 led by strong volumes across product categories. The toothpaste segment showed double digit growth with robust demand, while toothbrush and other discretionary segments witnessed a turnaround from the recent fall. Although rural market (expanded ~3x with Muskaan) continues to outshine urban, the latter registered some resurgence. New products like “Toothpaste for Diabetics” (#1 SKU on e-pharma, ~20% repeat rate), Vedshakti Spray & Oil are gaining strong traction, especially in modern trade and e-commerce channels (+1,400bps vs. FY19), besides improved market share. With high customer loyalty, magnified digital reach and strategic partnerships (Online – 1mg, Offline – Apollo), Colgate remains #1 penetrated brand (88%) across categories.

Gross margins improved with premiumization, price mix and investment towards brand building. EBITDA grew 13.8% QoQ to Rs. 422cr (+60.4% YoY) with an expansion in EBITDA margin by 280bps QoQ to 33.1% (+840bps YoY) upon large scale saving in ad spends (-24.9% QoQ, -4.3% YoY to Rs. 149cr) and other overheads. While material costs (+2.2% QoQ, +1.0% YoY) and employee expenses (+5.3% QoQ, +1.8% YoY) saw a mild uptick to Rs. 324cr and Rs. 91cr, respectively. Lower taxes and prior period reversals resulted in PAT spiraling 26.7% QoQ to Rs. 315cr (+54.1% YoY).

Company amplified its product portfolio with launches like “Recyclable Tube”, India’s first Augmented Reality toothbrush – “Colgate Magik” for kids in Q4FY21. Vedshakti’s mouth spray saw ~30% repeat purchases despite a new category. Witnessed, high market share gains in E-commerce and MT channels – ~39% accounts for Naturals, Ayurveda & Ingredient based toothpaste; ~30-33% for Family toothpaste.

With company’s primary focus to drive conversions through enduring increase in traffic and rising market share, we expect Colgate to continue delivering strong performance in the near-term. Given its entry into new product categories, expansion of existing brands, high customer loyalty and brand image, outlook remains promising. Hence, we reiterate our BUY rating on the stock with a target price of Rs. 1,910 based on 42x FY23E adj. EPS.

Analyst: Vincent K A, Geojit Financial Services Ltd., INH200000345

For Disclosures and Disclaimers please find the web link for the research notes: Colgate-Palmolive Ltd: https://bit.ly/3y5WQ2n

ITC limited is a diversified conglomerate with presence in FMCG, Hotels, Paperboards & Specialty Papers, Packaging, and Agri-business. Over the last decade, ITC’s new Consumer Goods Businesses have established a vibrant portfolio of 25 world-class Indian brands that create and retain value in India. ITC’s world class FMCG brands including Aashirvaad, Sunfeast, Yippee!, Bingo!, B Natural, ITC Master Chef, Fabelle, Sunbean, Fiama, Engage, Vivel, Savlon, Classmate, Paperkraft, Mangaldeep, Aim and others have garnered encouraging consumer franchise within a short span of time. While several of these brands are market leaders in their segments, others are making appreciable progress. The company directly employs over 36,500 people across businesses.

Q4FY21 standalone revenue rose 24.1% YoY (+16% on comparable basis) to Rs. 14,023cr on account of robust recovery across all the segments boosted by increased demand for discretionary products. During the quarter, Cigarettes sales volumes almost recovered to pre-COVID levels aiding sales growth of 14.2% YoY to Rs. 5,860cr. FMCG-Others business grew 15.8% YoY to Rs. 3,688cr mainly due to strong performance of Out-of-home categories supported by stable demand from food and Hygiene products. Agri business reported a robust 78.5% YoY growth in revenue to Rs. 3,369cr, while Paper & Packaging business topline grew 13.5% YoY to Rs. 1,656cr driven by strong demand from pharma and decor industries. Meanwhile, Hotels business declined by 38.2% YoY to Rs. 288cr, as the Travel & Tourism industry remained impacted due to the COVID-19 pandemic.

For Q4FY21, EBITDA grew 7.4% YoY to Rs. 4,473cr (+3.7% QoQ), despite EBITDA margin contraction of 490bps YoY to 31.9% primarily on higher cost of sales and other operating costs. EBITDA margin expansion was observed across some of the segments, but FMCG business led the expansion, as demand for branded foods increased. EBIT improved by 8.3% YoY to Rs. 4,085cr, whereas PAT remained largely stable at Rs. 3,748cr (vs. Rs. 3,797cr in Q4FY20), partially impacted by higher taxes (+54.7% YoY).

Integration of Sunrise Foods should help ITC focus on value adding niche products (Ex: Spices, etc.) which further enables margin expansion for this segment. Additionally, changing consumer buying preferences from private labels to branded ones should help drive demand. This shift in behavior could largely be attributed to increased concerns over hygiene and safety in the current pandemic scenario. ITC is well positioned to benefit from this opportunity with adequate inventory levels, coupled with rapid expansion on outlet and stockists front to capture demand going forward.

With constant focus on innovation and improving product-mix, ITC is well-placed to capture demand across segments. Steady topline growth along with improved margins going forward should help reduce its operational leverage, further boosted by its ability to implement structural changes in its value chain. We maintain a positive view on the stock and reiterate our BUY rating with a revised target price of Rs. 256 based on SOTP valuation.

Analyst: Sheen G, Geojit Financial Services Ltd., INH200000345

For Disclosures and Disclaimers please find the web link for the research notes: ITC Ltd: https://bit.ly/3h3Yg6p                                       

V-Guard Industries Ltd (VGIL) is one of the leading players in electrical consumer durables space. Major product segment includes Stabilizers, Cables & Wires, UPS, Pumps and Electrical Appliances. It has network of 31 branches which covers ~40,000 retail points with around 18,000 in south and balance in non-south with continuous additions.

VGIL’s Q4FY21 revenue grew by 58% YoY, on account strong demand rebound across product categories and re‐stocking of distribution channels, as lockdown eased out. Revenue growth was broad based across products, electronics segment, electrical & Consumer segments grew by 61%, 58% & 55% YoY, respectively. Resumption of construction activities also supported the recovery in demand. Revenue growth from south & non-south market grew by 50% & 71% YoY, respectively. Company gained market share in mid -premium Fans while lost some market share in water heaters due to closure of plants. Going ahead, second Covid wave is expected to hurt Q1FY22 revenues. VGIL is holding 15 days higher inventory to cater to pent up demand once the lockdown ease out. As per management the channel inventory is lower than last year and expect inventory to get depleted fast as market opens up. We expect revenue growth to normalize in Q2FY22. We factor revenue to grow by 14% CAGR over FY21-23E.

Gross margin declined by 190bps YoY to 31.4%, was impacted by higher cost & delay in pass through of higher commodity prices. EBITDA margins improved by 450bps YoY to 12.9% due to scale benefits and cost rationalization. EBITDA grew by 143% YoY. Despite higher tax, PAT grew by 110% YoY to Rs.68cr, albeit at a lower base. Going ahead, we expect price hikes (higher commodity prices), along with cost rationalization and strong revenue growth momentum, will expect EBITDA margin to stable. Consequently, we expect EPS to grow by 21% CAGR over FY21-23E.

VGIL long term outlook is improving given its strong product portfolio, improving retail presence, expanding its non-south market, strong cash flow and healthy balance sheet. Given strong earnings outlook & stable EBITDA margin profile, we maintain our positive outlook on the stock. We value VGIL at P/E of 44x on FY23E and maintain “Accumulate “rating with a target price of Rs297.

Analyst: Sheen G, Geojit Financial Services Ltd., INH200000345

For Disclosures and Disclaimers please find the web link for the research notes: V- Guard Industries Ltd:  https://bit.ly/2T8QLTE                                      

Mold-Tek Packaging Ltd (MTEP), one of leading manufacturers’ and suppliers of high quality airtight and pilfer proof containers/pails in India for Paints, Lubricants, Food and FMCG.

Q4FY21 revenue grew by 32% YoY, led by Paints, Lubes & FMCG segments which grew by 33%, 19% and 29% YoY respectively. Revenue growth was supported by strong volumes on account of pent-up demand and revival consumption spending. Strong volume growth in Paints segment is largely on account of higher off-take from Mysore and Vizag plants catering to Asian paints. MTEP’s strong competitive moat (technological edge and customized solutions) is expected to provide long term growth opportunities aided by increasing acceptance of IML in paint & strong growth in F&F segment on account of increased concern over hygiene. Newly introduced high margin personal/health care packaging products witnessed strong interest. Recent new client addition is Dhanukha for containers for its nutrients products. The CAPEX for FY22 is expected to Rs.45cr which includes expansion of paints capacity in Mysore & Vizag and capacity expansion of FMCG expansion in Hyderabad. Management has guided 15-18% volume growth in FY22. Though, Q1FY22 is expected to be impacted by Covid second wave, but expect the situation to normalise in Q2FY22. We expect revenue to grow by 17% CAGR over FY21-23E.

Gross margins improved by 180bps YoY to 43% on account of pass through of RM cost and higher scale. EBITDA grew by 74% YoY, while margins improved by 180bps YoY to 20.6% on account of cost rationalisation. EBITDA per ton was up by 35% YoY to Rs.42. Consequently, Profitability grew by 125% YoY to Rs.18cr. With gradual opening of economy post second Covid wave, we expect a broad based recovery across business segments. While EBITDA margins is expected to be healthy given pass through higher RM cost, scale benefits and higher margins products. We upgrade our EPS estimates by 6.4% & 4.6% for FY22E & FY23E and we expect PAT to grow by 21% for FY21-23E.

Going ahead, MTEP is expected to benefit from increasing acceptance of IML in paint, strong growth momentum in F&F segment and expansion of high margin products ranges. Ramp-up of volumes from new plants (Mysore & Vizag) and strong clients additions in FMCG segment are expected maintain the current earning momentum. Considering strong earnings of 21% CAGR, We value MTEP at 22x on FY23E, however, given sharp run-up in stock prices, we downgrade to Accumulate with a target price of Rs.547.

Analyst: Sheen G, Geojit Financial Services Ltd., INH200000345

For Disclosures and Disclaimers please find the web link for the research notes: Mold Tek Packaging Ltd: https://bit.ly/3zWJwyJ

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