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Colgate’s 4Q performance was slightly below our estimates (volumes and margins). Key positive is that market share has now begun to stabilize over 2HFY19. However, oral care category growth continues to trail FMCG sector. As a result, we don’t expect the co. to deliver high-single digit to low double digit volume growth unless it begins to gain significant market share (low probability). We maintain NEUTRAL and value the co. at 35x on Mar-21 EPS, arriving at a TP of Rs 1,227.
HIGHLIGHTS OF THE QUARTER
* Revenues grew by 6% (vs. exp. of 8%) driven by 5% volume growth. Volume growth was sluggish despite
(a) Pan-India launch of Swarna,
(b) Re-launch of flagship product (Dental cream),
(c) Higher promotions and
(d) Curbing market share loss.
* Naturals growth has now tapered to mid-teens from 25-30% range as the segment has gained meaningful share (>25%). Within naturals, Colgate has gained market share (8.1% in CY18 vs. 6.5-7% in CY17) driven by new launches and re-launch of Colgate Salt.
* Premium segment (4% mix vs. 8% mix earlier) has returned back to growth vs. degrowth earlier (impacted by naturals). Co. has re-launched Colgate Total to capitalize on this trend.
* GM declined by 110bps (exp. -65bps) as the co. stopped benefiting from low cost inventory (owing to benign crude). A&P/Other expenses grew by 9/8% which resulted in 1% growth in EBITDA (vs. exp of 8%). Management stays committed to prioritize volume growth over margin expansion (unlike FY18-FY19). We model 150bps EBITDAM expansion over FY19-21E.
* APAT grew by 2% to Rs 2.0bn (exp Rs 2.04bn) owing to higher other income and lower depreciation.
Colgate has attained the first step towards recovery i.e. stabilizing market share. Hereon, the co. needs to consolidate its position and return to market share gains. As a category leader, Colgate needs to drive category growth at a time when natural’s fad is moderating. We believe the co. is taking the right steps (although at a modest pace) i.e.
(a) Improving brand visibility (new TVC campaigns, in-store activations etc),
(b) Re-launches of flagship products,
(c) Regional based strategies (tastes and incomes),
(d) Focus on low unit packs (drive sampling) and
(e) Higher promotions (via multi-unit packs). We model partial recovery in volume growth and market share in FY20-21E. With limited upside, we remain NEUTRAL on the company.
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HDFC Securities Limited (HSL) is a SEBI Registered Research Analyst having registration no. INH000002475
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