Colgate Q2FY18 topline growth of 2.7% was a tad below our estimates led by lower than expected volumes, which dipped 0.9% y-o-y.
Colgate Q2FY18 topline growth of 2.7% was a tad below our estimates led by lower than expected volumes, which dipped 0.9% y-o-y. Savings in advertisements and other expenditure resulted in margin beat. Other expenditure saving was also led by GST which is sustainable; ad spends however need to pick up to contain market share loss. We maintain a Hold rating with price target of Rs 1,045.
No surprise on topline front: Amidst 8-9% price cuts post GST, a fourth consecutive quarter of negative volumes was disappointing. However, volume growth is expected to go back to positive territory in Q3FY18 helped by lower base and GST led price cuts.
Margin beat led by savings in ad spends: Margins expanded 170bps y-o-y led by 112bps y-o-y and 84bps y-o-y savings in ad spends and other expenditure respectively.
Market share loss a key worry: Colgate lost market share – toothpaste market share down to 54% from 55.1% in FY17. Share loss is more worrying as, unlike Colgate, other players in ayurvedic segment did not take significant price cuts. We believe going forward, share gains will be difficult for Colgate.
Valuation/risks: We slightly cut our revenue assumptions due to slow recovery in volumes; however, we increase our EPS estimates marginally owing to lower ad spends and savings in other expenditure. We maintain a Hold on the stock with a price target of Rs 1,045, valuing at 38x Sep 19E EPS.