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Soft quarter with higher inflation impacted margins; reiterate ADD

Our view

Company delivered a soft quarter performance with both revenue and margin came in below estimates as inflation and rural slowdown impacted volume growth. Key negative was volume decline of ~2.5% (on a base of 8% in base quarter) and revenue growth of only 2.5% indicating sluggishness especially in rural demand. EBITDA margin came in much below estimates owing to significant increase in A&P and other expenses. We believe A&P spends will be higher to strengthen innovation and brand building activities going forward. With management indicating its endeavor to maintain balance between volume and price growth, we expect a gradual improvement in volume albeit at a slower pace than expected with growth driven by premiumization and mix improvement. While the company has turned more aggressive on new launches and entered new oral care segments, more traction in these segments or entry into new categories would be required to pull up the growth trajectory towards high single digits. Market share should gradually start improving with aggressive marketing spends, traction in rural markets, distribution efforts across channels and strong momentum in Vedshakti portfolio. Personal care under Palmolive brand and toothbrushes should take few quarters to reach scalability potential. We reiterate ADD given limited upside on the stock.

Result Highlights

Financial summary – Revenue grew 2.5% YoY to Rs11.96bn with ~2.5% volume decline in Q1, gross margins contracted 280bps YoY due to cost inflation with limited price hikes, EBITDA margins decreased 580bps/3300bps QoQ/YoY owing to higher A&P and other expenses. PAT down 6.1%.

 Quarter highlights – 2.5% volume decline on a base of 8% volume growth looks disappointing on the back of rural slowdown and higher inflation. CLGT’s intent to balance volumes and revenue growth led to GM contraction as company has not taken aggressive price hikes. A&P spends increased 11% QoQ, SGA expense up 8% YoY. ?

Margins – Gross margin plunged 280bps to 66.3%. EBITDA margin came in at 27.2% vs 30.5% YoY. PAT margin came in at 18.3% vs 20% in Q1FY23.

Valuation

We maintain our estimates as of now and wait for company to deliver on revenue and margin performance in coming quarters. We model in revenue/EBITDA/PAT CAGR of 8%/10%/11% over FY22?24E and maintain an ADD rating with TP of Rs1,726 based on 35x FY24E earnings, in line with the company’s LPA valuation multiple.

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