Add Colgate Palmolive Ltd For Target Rs.1,750 - ICICI Securities
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Domestic revenue growth of 20% (2-year CAGR of 5%) was inline. Volume growth was ~16% (our estimate). Focus towards the naturals category (gained market shares), increasing brand visibility and step-up in innovations are positives.
We believe Colgate is continuing to benefit from (1) a largely ‘essential’ portfolio, (2) presence across the price-benefit pyramid – helps capture any impact of downtrading, (3) strong distribution reach and (4) premiumisation driven by differentiated products with focus on MT and E-com. That said, weak macros are likely to impact premiumisation and delay the likely business plan to diversify in other home and personal care categories. Further, consumers switching to functional (ingredient-based) toothpaste remains a concern. ADD; TP Rs1,750.
* Growth momentum continued:
Revenue / EBITDA / PAT grew 20% / 60% / 54% respectively driven by double-digit growth across categories. Domestic revenues also grew by 20% with volume growth of 16% (our estimate). We also note that this strong performance is being driven by urban witnessing strong recovery with sustained growth momentum in rural and new product launches – Colgate Vedshakti franchisee extended to new categories like Mouth spray and Oil pulling, World’s first toothpaste for Diabetics, expansion of Naturals toothbrush portfolio with Super Flexi Salt and Zig Zag Turmeric, Colgate Magik toothbrush for kids. Brand wise Colgate Strong Teeth and Colgate MaxFresh witnessed accelerated double-digit growth.
* Significant margin expansion:
Gross margins expanded 300bps driven by pricing and favourable mix (higher salience of bigger packs and premium products, higher toothpaste shares versus toothbrush). EBITDA margin expansion was higher at 830bps to 32.9% primarily due to cost saving initiatives (other opex down 120bps) and operating leverage - ad-spends (down 290bps YoY; -4% on an absolute basis) and staff costs (down 130bps). We expect Colgate to be able to manage any nearterm input cost inflation by price increases (5% growth in realisation), rationalisation of ad-spends and cost savings.
* Other highlights:
1) OCF and FCF grew by 49% / 53% respectively to Rs13.3bn / Rs12.7bn (adjusted for dividend considered as financial assets in cash flow), 2) Net working capital days improved by 8 days (to -23 days) largely due to higher creditor days, 3) Gained market shares in new age channels – E-commerce (+1400bps) and Modern Trade (+170bps).
* Valuations and risks:
We increase our earnings estimates by ~2%; modelling revenue / EBITDA / PAT CAGR of 9 / 7 / 7 (%) over FY21-23E. Maintain ADD with DCF-based revised target price of Rs 1,750 (earlier Rs1,700). Key downside risk is lower-than-expected market share gains.
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