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Growth still elusive but margins keep racing ahead

Result Highlights

* Financial summary – 20% revenue growth on a base of 8% decline indicating volume growth ~14%, gross margins up 310bps due to price hikes and better SKU and segment mix, EBITDA margins up 840bps to cost controls and lower adspends, PAT growth of 54%.

* Quarter highlights  ‐  Continued growth momentum with double‐digit growth witnessed in key segments including toothbrush, rural growth sustained while urban growth recovered, strong share gains in MT and ecom channels.

* Margin improvement drivers – Price hikes through the year including in 4Q, lower exports, toothpaste growing faster than toothbrush, better SKU mix in favor of bigger size packs and premium SKUs, controlled media spends while retaining brand recall shares, cost efficiency measures.

* Vedshakti performance – Strong momentum continued with 60bps market share gains, brand loyalty up to 50%; created new category with launch of Vedshakti mouth spray (30% repeat purchases), available in 100k stores, reached 1% market share.

Valuation and view ‐

Colgate’s 4Q performance was a strong beat on the margin front with both gross and EBITDA margins making new all‐time highs while underlying volume growth still remains soft with growth driven by premiumization and a better mix. While the company has turned more aggressive on new launches and entry into new oral care segments, more traction in these segments or entry into new categories would be required to pull up the growth trajectory from mid to high single digits.

Market shares seem to have bottomed out and should gradually start improving with 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 launched have high scalability potential.  

We build in 8.3%/8.2% revenue/PAT CAGR for the company over FY21‐23E expecting an improvement in growth trajectory from the 4.6% seen from FY16‐21 with margins setting 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 assume coverage on CLGT with an ADD rating with a PT of Rs 1,782 based on 40x FY23E 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 via scale‐ up of new launches.

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