Add Colgate-Palmolive Ltd For Target Rs.1,750 - ICICI Direct
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Another soft quarter
1QFY23 revenue growth of 2.6% YoY was again underwhelming but not unexpected. Furthermore, gross margin pressure (down 280bps YoY, again as expected) and weak growth led to EBITDA margin declining to 27.2% (some increase in opex as well). We note that Colgate had become more margin focussed over last few quarters.
While the performance has not seen any visible uptick, we still believe (link) fundamentals and narrative (important) may potentially improve over 12-24 months. Sustenance of deceleration in growth of naturals segment within toothpaste removes an important growth headwind for Colgate. The simple template of new CEO (joining in Sep-22) driving stock performance is also yet to play out. Lastly, the work on new categories / innovations is finally getting unveiled.
We believe weak macros have likely delayed the execution on some of the important markers. A (strong) hope and decent valuation keep our positive stance intact. Maintain ADD.
* Growth continues to be weak: Net sales were up 2.6% YoY to Rs12bn, broadly inline with our estimate. The top-line performance continues to underwhelm due to macro and category challenges. Management has highlighted demand challenges due to rural slowdown with expectations of improvement in the coming quarters. While Colgate has enhanced focus on some sub-categories and new launches, the uptick in revenue is still not visible.
* Margin pressure continues: Gross margins contracted 280bps YoY to 66.3%. We believe this is due to (1) inflationary RM (particularly packaging material) and (2) possibly adverse mix (YoY). Sequentially, gross margin was down 50bps. EBITDA margin fell to 27.2%. We note that Colgate has delivered healthy EBITDA margins for the last many quarters (this is a 9 quarter low). Even in 4QFY22, EBITDA margin was 33%. Other expenses were up 8% YoY while ad-spends rose only 2% YoY. EBITDA was down 8% YoY. Recurring PAT declined 6% YoY to Rs2.2bn. We do expect some increase in ad-spends to support its new launches.
* Valuations and risks: We cut our earnings estimates by ~7%/6% for FY23-24E; modelling revenue / EBITDA / PAT CAGR of 6 / 6 / 5 (%) over FY22-24E. Maintain ADD with DCF-based revised target price of Rs1,750 (was Rs1,800). Key downside risk is lower-than-expected market share gains.
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