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Sustained elevated margins despite high ad spends…

Colgate reported strong results with 19.8% revenue growth largely led by volumes. Though a low base quarter resulted in strong growth in Q4, we believe continued healthy traction in rural regions also contributed to strong numbers. New products like Colgate toothpaste for diabetics, Vedshakti Spray & Oil are witnessing strong growth, specifically in chemist & e-commerce channels.

Toothpaste category remained insulated from pandemic but toothbrush category growth was adversely impacted given discretionary nature of the product. Gross margins expanded 301 bps mainly due to benign prices of calcium carbonate & Sorbitol. The company saved 126 bps in employee spends, 291 bps in marketing spends & 114 bps in other overhead in Q4. Operating profit grew 60.4% to | 421.8 crore. Operating margins expanded 833 bps to 32.9%. Led by higher operating profit, PAT grew 54.1% to | 314.7 crore.

Naturals, Ayurveda & Ingredient sizable part of category

In the last five years, the oral care industry has moved from family toothpaste to naturals, Ayurveda & ingredient based toothpaste with 39% of the total category contribution. Though core brand for the company remains Colgate Dental Cream, it is also focusing on naturals & ingredient based product with Colgate Vedshakti & Colgate Salt.

The company is driving premiumisation trend with Colgate Total & Colgate Visible White. Further, with the launch of toothpaste for Diabetics, the company is trying to capture certain niches. Moreover, Vedshakti mouth protect spray has seen a successful launch with availability improving to 1 lakh stores and 30% repeat purchase. We believe focus on naturals, ingredient based toothpaste & new products has helped the company to curb the market share fall. We estimate 7.9% CAGR sales growth for the company in FY21-23E.

Margin to sustain at elevated levels

The decline in prices of Sorbitol & Calcium Carbonate helped Colgate to improve operating margins in FY21. Colgate has sustained its advertisement volumes even in a pandemic year but got some benefit from lower ad-rates. With the prominence of digital channels for advertisement, the company would be able to maintain the current advertisement spends. We estimate advertisement spends at 12-13% of sales. With judicious price hikes, premiumisation & sustainable low overhead costs, the company would be able to maintain elevated operating margins at ~31%.

Valuation & Outlook

With the focus on naturals and introduction of new product, the company has been able to sustain growth & market share in the last few years. Moreover, Colgate has been able to scale up its gross margins & operating margins despite high marketing spends depicts the its brand’s pricing power. With sustained growth and margins, we believe the stock should command high valuation multiples. We maintain BUY rating with a revised target price of | 1900/share (earlier | 1860).

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