While we continue to like Colgate as the dominant force in the oral care segment with large scale and superior economics, value creation and multiple re-rating are very sensitive to the sustained recovery in volume growth.
1) Topline growth remains subdued: With sales growth stuck in mid-to-low-single digits, volume growth has been stubbornly weak for several quarters now. The rural slowdown has also added to structural challenges to growth. 2) Market share yet to see a revival: Despite several product launches and continued significant investment in A&P, a weak top- line suggests that Colgate is yet to begin its journey to regain lost market share. While its ‘naturals’ range of toothpaste ‘Vedshakti’ has gained traction, it still doesn’t move the needle at the aggregate level, in our view. 3) Margin-led earnings catalyst is less material now: In the absence of healthy topline growth, any prospect of an earnings rebound on margin expansion will likely be a less material catalyst for valuation re-rating and will be perceived as only a transient gain, in our view. 4) Move to expand personal care is encouraging but less material: Colgate has expanded its Palmolive brand beyond body wash to face cleansing, but still it is far from being meaningful at the topline level. 5) Implied expectations in valuation are significant: Despite CLGT underperforming its FMCG peers YTD (up 4% vs +11% in Nifty FMCG Index), its current price builds in c10% long-term earnings growth expectations, which are still significant and rich in absence of a meaningful revival in volume growth, in our view.
Q1 missed expectations: 1) Colgate’s sales grew by 2.5% y-o-y (3% below consensus estimate) impacted by the rural slowdown. However, the company is hopeful that the trend will improve. 2) Raw material inflation persisted leading to a gross margin decline of 290bp y-o-y to 66.0%. Ebitda margin was down 323bp y-o-y to 27.4%. 3) Other income jumped 121% y-o-y in Q1, thereby boosting profits. 4) Ebitda/clean PAT were down by 8.3%/6.1% y-o-y.
5) Recent launches such as Visible White O2, Palmolive face care range have been tracking well, as per management.
Retain Hold: We adjust our estimates and roll-forward valuation, which leads to a lower TP of Rs 1,650 (from Rs 1,670). We maintain our Hold rating.