Add Colgate Palmolive Ltd For Target Rs.1,850 - ICICI Securities
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Underwhelming; that’s an understatement
Colgate continues to underwhelm. It is yet to demonstrate any evidence of (sustainable) growth in its chosen operating category in India, which is oral care. Despite the category / competitive tailwinds (our view), 1QFY22 revenues grew just 3.7% (2-year CAGR). Consensus (including us) has three expectations from CLGT – (1) drive growth in natural segment, (2) play the role of a category leader and drive category usage (per capita consumption) and (3) diversify in other home and personal care categories (a key priority under Mr Ram Raghavan, in our opinion).
While weak macros would have likely delayed the execution on the above markers, we expect some positive developments on these fronts in nearterm. Potential to diversify the portfolio outside of oral-care is the only reason, for now, for our ADD rating.
* Growth slows down: Revenue / EBITDA / PAT grew 12% / 15% / 18% with volume growth of 9% (our estimate). Topline performance was quite weak actually – on a 2- year CAGR basis, revenue was up just 3.7%. We note that revenue growth trajectory has seen a slowdown (on 2-year CAGR basis) since the last two quarters (5.5% in the previous quarter). While Colgate has enhanced focused on several new categories in the last year (Mouth spray, Oil pulling, toothpaste for Diabetics, expansion of Naturals toothbrush portfolio), the uptick in revenue is still not visible. It did highlight that there was growth across categories implying toothbrushes would have seen an uptick as well, on a weak base though.
* Significant margin expansion: Gross margins expanded 300bps driven by favourable RM and pricing. EBITDA margin expansion was lower at 90bps to 30.5% primarily due to significant ramp-up in ad-spends (280bps YoY) while staff costs (down 60bps) and other opex (down 10bps) had some operating leverage benefit. We note that Colgate has delivered 30%+ EBITDA margin print consistently for the last four quarters. We believe Colgate will be able to manage any near-term input cost inflation by rationalisation of ad-spends and cost savings.
* Valuations and risks: We largely maintain our earnings estimates; modelling revenue / EBITDA / PAT CAGR of 8 / 7 / 7 (%) over FY21-23E. Maintain ADD with DCF-based target price of Rs 1,850. Key downside risk is lower-than-expected market share gains.
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