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Topline disappointed but margins shine; reiterate ADD

Result Highlights

* Financial summary – Revenue grew 12% on a base of 4% decline indicating volume growth of ~8%, revenue 2‐yr CAGR at 3.7% and volume is flat on 2‐yr basis, gross margins expanded 300bps due to price hikes & product mix while EBITDA margins up were only 90bps given a sharp increase in adspends, PAT growth of 18%.

* Quarter highlights – While volume growth was subdued on weak base of 7% volume decline, CLGT witnessed broad based growth across all categories and ~4% price hike & better product mix aided GM expansion. Adspends increased 40%/7.6% YoY/QoQ as company upped marketing investments in both its core portfolio and new launches.  

* Margins – Consecutive price hikes in 4Q and 1Q coupled with better SKU mix in favor of bigger size packs and premium SKUs helped deliver strong EBITDA margins at 30.5%. PAT margin came in at 20% vs 19% in 1QFY21.

* Other highlights – Company continuing to see traction in recently launched Colgate special toothpaste for diabetics, Vedshakti mouthspray and Vedshakti oil pulling. Launched Colgate Magik toothbrush during the quarter.

Valuation and view 

While Colgate’s 1Q performance was soft on the topline front, gross margin expansion demonstrates company’s pricing power and premiumization opportunities.  Underlying volume growth still remains elusive with growth driven by premiumization and a better mix. While the company has turned more aggressive on new launches and entered into 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 also recover post a muted FY21 while a few of the new launches have high scalability potential.

We build in 8.3%/7.5% revenue/PAT CAGR for the company over FY21‐24E expecting an improvement in growth trajectory from the 4.6% seen from FY16‐21 with margins settling slightly below current levels. The increased dividend payouts have also led to a sharp improvement in return ratios and should act also support valuations. We roll over our valuations to FY24E and maintain an ADD rating with a PT of Rs 1,892 based on 40x FY24E earnings, in‐line with its 5‐yr average multiple. Market share getting back above 50% and strong scale‐up in new launches should be the key positive triggers for the stock. Key risks would be further loss of market share in oral care to Dabur or HUL and failure to move up the overall growth trajectory.

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