Published on 31/07/2021 11:20:13 AM | Source: Motilal Oswal Financial Services Ltd

Neutral Colgate‐Palmolive Ltd For Target Rs.1,770 - Motilal Oswal

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Continued weak sales growth; weak outlook ahead

* Colgate-Palmolive (CLGT)’s weak sales growth trend has persisted in recent quarters. In 1QFY22 as well, the two-year average sales growth was at the lower end of the 4–6% range seen in recent quarters. It has now been six years since the company reported over 7% sales growth in any year. With (a) the launch of the Non-Oral Care portfolio and (b) investments under the ‘Brush Twice a Day’ campaign seemingly on the backburner, it is unlikely to return to the double-digit sales growth seen over FY08–15 anytime soon.

* There is no evidence that the company is re-gaining lost market share in the core Oral Care business. While ad spend increased 40.6% YoY on a low base, at 13.7% of sales, this was still the second highest in the past five quarters – perhaps, this indicates some efforts to boost share, the only silver lining for the company amid a disappointing 1QFY22 result.

* We had downgraded the stock to Neutral post the 4QFY21 results, and while valuations may appear inexpensive v/s Staples and Discretionary peers, mid-single-digit PBT and PAT CAGRs do not warrant a change in view. Maintain Neutral.


Sales miss disappointing given low base; ad spends weigh on operating margin

* Net sales grew 12% YoY to INR11.7b (est. INR12.1b) in 1QFY22. EBITDA was up 15.3% YoY to INR3.6b (est. INR3.8b). PBT grew 17.7% YoY to INR3.1b (est. INR3.4b). Adj. PAT grew 17.7% YoY to INR2.3b (est. INR2.5b). Two-year sales / EBITDA / adj. PAT CAGR came in at 3.7%/8.9%/17.4%.

* Gross margins expanded 300bp YoY to 69.1% (est. 67.1%).

* CLGT is likely to have posted domestic volume growth of 8% YoY (est. 12%) in 1QFY22.

* As a percentage of sales, lower staff costs (-60bp YoY), other expenses (- 10bp YoY), and higher ad spend (+280bp YoY) led to EBITDA margin expansion of 90bp YoY to 30.5% (est. 31.1%).

* Absolute ad spends were up 40.6% YoY and 7.6% sequentially during the quarter.


Highlights from management commentary

* Continued investments in brand building and innovation have strengthened core brand metrics.

* Colgate Special Toothpaste for Diabetics, Colgate Vedshakti Mouthspray, and Colgate Vedshakti Oil Pulling are great examples of recent innovations by the company.

* During the quarter, the company launched the Colgate Magik Toothbrush – the first Augmented Reality toothbrush for kids.

* CLGT’s recent ‘digital-first’ campaign for Colgate Vedshakti Oil Pulling featured leading influencers.


Valuation and view

* 1QFY22 was another disappointing quarter for CLGT. While the cut in our earnings estimate is marginal, EPS growth of 5.3% CAGR over FY21–23E does not offer much scope for optimism.

* We had downgraded the stock to Neutral post the 4QFY21 result. The cornerstones of our earlier optimism on improved topline growth in CLGT were (a) new launches in Oral Care, (b) a potentially higher play in Naturals (38–39% in the category, where CLGT was significantly under-indexed), (c) new launches in Non-Oral Care (just ~2% of sales currently v/s around half the sales for the parent) – leveraging on CLGT’s extensive distribution reach, and d) the implementation of the ‘Brush Twice a Day’ campaign.

* These initiatives could have not only led to the recouping of lost market share of ~600bp over the last 6–7 years but also boosted overall sales growth. CLGT also had significant underutilized capacity, as a result of which healthy topline growth would have resulted in even stronger earnings growth. However, the company has either disappointed on these aspects or significantly postponed the same, contrary to our earlier assumptions.

* With weak topline and earnings growth likely to sustain going forward, the valuation at 40.5x FY23E EPS appears fair. We assign a value of 40x Sep’23E EPS to arrive at TP of INR1,770/share. Maintain Neutral.


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