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View: Volume growth under pressure due to demand slowdown
* The Q2FY20 revenue was in line with our expectation. On a base of 7%, the volume growth was 4% - was slightly below our estimate. We do not view this as a weak performance considering the economic slowdown, especially in rural, liquidity challenges and intense competition in the oral care category.
* The company has raised A&SP spends in last three consecutive quarters to boost volume growth. This is likely to pressurize EBITDA margin in the short term.
* We believe that Colgate’s volume growth should recover further on a favorable base. Government’s efforts to increase farmer’s wages and focus on rural infrastructure should augur well.
* Also, as the distribution reach of Swarna Vedshakti continues to rise, the company’s market share in the natural category is likely to increase further. The deceleration in Patanjali sales should also help Colgate to regain some lost market share.
* We have revised our FY20E and FY21E EPS to 31.3 and 33.8, respectively, to factor in Q2 performance. We value the stock at 48x FY21 EPS to arrive at a TP of 1,638. Maintain Accumulate.
Revenue in line, EBITDA lower than estimates
Net revenues jumped 4.6% YoY to 12.2bn. EBITDA fell 2.0% to 3.2bn – came below our estimate. GM remained flat at 64.7%. A 20/250bps increase in employee cost/A&P spends respectively was partially offset by 90 bps decrease in other expense. Consequently, EBITDA margin declined 180bps to 26.4%. APAT increased 24.3% to 2.4bn -came marginally ahead of our estimate.
Expect recovery in market share
The company’s market share in the naturals category improved from 6.5- 7% in CY18 to 8% in FY19. We believe the fall in overall market share since FY16, primarily due to competition from Patanjali, was arrested. Our channel checks suggest that Patanjali is facing serious distribution led issues. This is most likely to benefit Colgate and Dabur, as these companies were impacted in the past three years. Further, Colgate is likely to experience sales growth stabilization in rural markets; it garners 45%+ of its revenue from these markets. With continuous renovations and new launches in the category, we expect Colgate to further increase its market share .
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