Colgate Q2 Results Review - Another Quarter Of Margin-Led Beat But Volumes Still Soft: Systematix

Systematix Research Report

Colgate-Palmolive India Ltd. delivered another earnings beat in Q2, with in-line revenue growth of 6% (higher domestic growth of 6.6%) but better than expected margins driving 18%/22% growth in Ebitda/profit after tax.

Led by pricing actions, cost efficiencies and high single-digit growth in the high margin toothpaste segment, margins improved 340 basis points YoY to 32.8%.

Category growth initiatives are showing some positive signs in addition to a recovery in rural markets and a good response to new innovations and renovations.

Colgate seems to have had some volume share gains driven by good execution. A 6% YoY revenue growth resulted in a three-year compound annual growth rate of 4.6%. We estimate about 3% volume growth on a base of 3% decline YoY. Ebitda margin expansion was lower than the 502 bps uptick in gross margin given sharp increase in advertisement expenses (up 260 bps to 14%) partially offset by cut in other expenses (down 130 bps to 14.8%).

With raw material prices stabilising and recent price hikes, we believe gross margins should stabilise, which would support Colgate’s product innovation and category expansion initiatives.

While early signs of success are visible on new launches and relaunches, Colgate would need continued traction in these segments to pull up its growth trajectory towards high single digit.

We expect market share to gradually improve, with aggressive marketing spends, recovery in rural markets, plateauing of naturals category and distribution efforts across channels.

Personal care under the Palmolive brand and toothbrushes segment may take some more time to scale up.

We build in a slightly better margin outlook and now build in 8.6%/13.9% revenue/profit after tax compound annual growth rate over FY23-25E maintain our 'Hold' rating with an increased target price of Rs 2,020 (Rs 1,980 earlier), based on a target price/earning of 40 times FY25E earnings per share, in line with the five-year average average valuation multiple.

We expect a further rerating once we see a sustained recovery in market share driving higher volumes.

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