Third-quarter volume growth of 2% was disappointing given the competitive tailwinds (Patanjali). That said, (relatively) low aspiration (vs HUL and Indian peers, in our view) and lack of aggression have been our concerns about Colgate for long. Volume growth of 2% is underwhelming given the 9% revenue growth in oral care for Dabur (+40bps market share). We expect a market share trajectory improvement for Colgate under Ram Raghavan (new MD) driven by a tweak in communication focussing on natural ingredients and new launches, plans to drive category growth (increasing usage in rural and not just through penetration) and driving premiumisation. Retain ADD.
Reported revenue /Ebitda/recurring PAT grew 4%/1%/9%. Volume grew 2%, leading to a 4% growth in domestic revenue (96% of the business). Colgate’s volume growth needs to be seen in the context of weak category performance (category volume declined 4%) in both rural and urban, translating into a stable market share for Colgate (52%, our estimate). Price/ mix growth in the domestic business improved to 2% helped by a price hike (taken in July 2019) and anniversarisation of higher promotions.
Colgate’s recent activities were relaunch of Colgate Strong Teeth brand and launch of new Charcoal version (black colour toothpaste) — both showed good initial performance. The campaign ‘Smile Karo Aur Shuru Ho
Jao’ that was launched in Q2 also continued focus on the overall branding of the company. We believe that Colgate will continue to launch new products supported by strong campaigns to regain lost market share.
Gross margin improved 60bps y-o-y to 65.7% due to benign input inflation and price hike in Q2. However, Ebitda margin declined 110bps y-oy to 27.6% primarily driven by continued high ad-spends (+100bps y-o-y) and one-off costs in other expenses (+40bps y-o-y).
We cut our estimates by 3-4% to incorporate weak category growth expectations in the near-term; modelling revenue/Ebitda/PAT CAGR of 9%/10%/14% over FY19-22E. We maintain ADD rating with a DCF-based revised target price of `1,500 (was `1,650). At our target price, the stock will trade at 38x P/E multiple March 2022E.