Published on 16/09/2020 11:50:15 AM | Source: ICICI Securities Ltd

Hold Colgate Palmolive (India) Ltd For Target Rs.1,500 - ICICI Securities

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A beat on all counts

1QFY21 revenue decline of (just) 4% was ahead of consensus estimates. Internals were pleasing – toothpaste had ‘positive sales growth’ – a likely case of market share gains (inline with our thesis). We believe Colgate benefited from (1) a largely ‘essential’ portfolio, (2) presence across the price-benefit pyramid – help capture any impact of downtrading and (3) strong distribution reach, especially in rural India which was relatively less impacted. Focus towards the naturals category and increasing brand visibility inspires confidence. That said, weak macros are likely to impact premiumisation and delay the likely business plan to diversify in other home and personal care categories. Our earnings estimates are up ~5%; modelling revenue / EBITDA / PAT CAGR of 6 / 11 / 12 (%) over FY20-22E. Retain HOLD. Our recent upgrade of Colgate was based on management’s commentary that “FY21 performance is likely to remain resilient and not materially impacted by COVID given the essential nature of the product”. We noted that this could potentially result in a beat versus consensus expectations of flat revenues in FY21. See report here.

* Toothpaste revenues grew in 1Q: Company revenue declined 4% while EBITDA / PAT grew 3% / 17% respectively. More importantly, toothpaste revenues grew in the quarter – a significant outperformance, in our view. We believe that, Colgate gained market shares in the quarter, helped by strong execution and making the products available to the consumer. Colgate launched Hand Sanitiser under the Palmolive brand and also launched a new range of toothbrushes – Colgate Gentle.

* Margin expansion helped by ad-spend rationalisation: Gross margin improved 30bps YoY to 66.1% (input costs remained stable). However, EBITDA margin expanded 200bps to 29.6% (highest quarterly profit) primarily driven by rationalisation in ad-spends (down 300bps YoY; -25% YoY on absolute basis) significantly offsetting negative operating leverage – staff costs (+9% YoY) and other opex (-2% YoY).

* Outlook: Given largely essential product portfolio for Colgate, we expect the impact to be the least among HPC companies. Management continues to focus on driving growth through (1) building brands and increasing household penetration, (2) innovation, (3) winning in emerging channels and (4) strengthening its go-to-markets.

* Valuations and risks: We increase our earnings estimates by 4-5%; modelling revenue / EBITDA / PAT CAGR of 6 / 11 / 12 (%) over FY20-22E. Maintain HOLD rating with DCF-based revised target price of Rs 1,500 (was Rs1,400). Key upside risk to our thesis is faster-than-anticipated recovery in macro driving premiumisation and key downside risk is lower-than-expected market share gains.


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