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Reasonable valuations, limited margin headwinds and decent growth outlook; upgrade to BUY

Our view

While revenue came in‐line with our estimates, margins came in lower than estimates owing to lower price hikes compared to input cost inflation during the quarter. Underlying volume growth outlook seems to be improving gradually albeit at a slow pace driven by premiumization and mix improvement. While the company has turned more aggressive on new launches and entered 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 started showing signs of recovery while a few of the new launches have high scalability potential. We upgrade to BUY from ADD as in our view, the recent correction offers a good entry opportunity in the stock as it is relatively better placed on comparable valuations and margin headwinds.

Result Highlight

* Financial summary – Revenue grew 5.2% YoY to Rs13.5bn indicating volume growth of ~3%, gross margins contracted 130bps due to limited price hikes, EBITDA margins also declined 220bps given a sharp increase in A&P spend, PAT declined by 1.8%.

* Quarter highlights – While volume growth was muted on a base of 4% volume growth, CLGT witnessed broad based growth across all categories and ~mere 2% price hike led to GM contraction. A&P spend increased 13%/16% YoY/QoQ as company has been aggressive in marketing investments in both its core portfolio and new launches.  

* Margins –CLGT witnessed inflation of around 3‐4% in RM coupled with higher A&P spends which impacted EBITDA margin by 220bps/90bps YoY/QoQ to 29.6%. PAT margin came in at 19.9% vs 21.3% in Q2FY21.

Valuation

Given an improving growth outlook albeit at slow pace, limited margin headwinds and recent underperformance, current valuations at 35x/32x FY23E/FY24E looks attractive. We model in revenue/PAT CAGR of 8.3%/7.5% over FY21‐24E expecting an improvement in growth trajectory from 4.6% seen from FY16‐21 with margins settling slightly below FY21 levels.

The increased dividend payouts have also led to a sharp improvement in return ratios and should also support valuations. We upgrade our rating from ADD to BUY with an unchanged TP of Rs1,892 based on 40x FY24E earnings.

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