Notably, certain factors that led to the positive margin surprise in 4QFY21 and the full-year FY21 — resulting in all-time high EBITDA margins — are not sustainable.
Colgate-Palmolive (CLGT)’s weak sales growth trend has persisted in recent quarters, including 4QFY21 — the two-year average sales growth stands at 5-6%. It has now been six years since the company reported over 7% sales growth for any year. With (a) the launch of its Non-Oral Care portfolio and (b) investments under the ‘Brush Twice a Day’ campaign seemingly on the backburner, it is unlikely to return to the double-digit sales growth seen over FY08–15 anytime soon.
Notably, certain factors that led to the positive margin surprise in 4QFY21 and the full-year FY21 — resulting in all-time high EBITDA margins — are not sustainable. These include (a) higher priced (and higher margin) SKUs gaining prominence in FY21 on account of customers showing a preference for larger packs, (b) slower sales in the low-margin toothbrush category — as the product is more discretionary than toothpaste, (c) lower-than-expected advertising spends in 4QFY21 and the full-year FY21, and (d) intensifying cost pressure due to crude-led RM inflation.
CLGT is likely to have posted domestic volume growth of 16% YoY in 4QFY21 (est. 17%).
Net sales grew 19.8% YoY to Rs 12.8b (in line with estimates) in 4QFY21. EBITDA was up 60.4% YoY to Rs 4.2b (est. Rs 3.9b). PBT grew 62.7% YoY to Rs 3.8b (est. Rs 3.4b). Adj. PAT grew 54.1% YoY to Rs 3.1b (est. Rs 2.6b). The two-year sales / EBITDA / adj. PAT CAGR came in at 5.5%/16.6%/25.4%.
Gross margins expanded 300bp YoY to 67.7% (in line with estimates).
FY21 sales/EBITDA/adj. PAT grew 7%/25.6%/26.8% to Rs 48.4b/ Rs 15.1b/ Rs 10.4b.
Valuation and view: The cornerstones of our earlier optimism on improved topline growth in CLGT were (a) new launches in Oral Care, (b) a potentially higher play in Naturals (38–39% of the category where CLGT was significantly under-indexed), (c) new launches in Non-Oral Care (~only 2% of sales currently v/s around half the sales for the parent) – leveraging on CLGT’s extensive distribution reach and implementation of the Brush Twice a Day campaign.
While there is no material change in our FY22E EPS, we reduce our FY23E EPS forecasts by ~6%, weighed by weak sales trends and lower margins. With weak topline and earnings growth likely to sustain going forward, the valuation at 37.6x FY23E EPS appears fair. We assign a value of 40x FY23E to arrive at our TP of Rs 1,700/share. Downgrade to Neutral.