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Slight miss on growth

* CLGT reported a slight miss on the topline in Q1. Sales grew 12% (4% miss), aided by double-digit volume growth on low comparables. Lockdowns affected sales, particularly in toothbrush, sequentially driving the sales miss. PAT rose 18%, with margins up 90bps yoy.

* After an improvement in sales growth over last 2 quarters, growth moderated to ~4% (2yr CAGR) due to the lockdown impact. Toothpaste growth was ahead at ~6% (2yr CAGR) and should improve further as CLGT recovers some of the lost sales in coming quarters.

* Margin expansion is driven by low-priced input inventories, pricing and SKU mix. Input inflation is largely crude led and may reduce margins ahead. We factor in a 100bps decline in EBITDA margins in FY22 on higher input inflation and step-up in brand spends.

* We maintain our estimates but believe that improvement in growth and stable margins can offer potential upsides. Valuations at 39x FY23E EPS are attractive relative to peers. Retain Buy with a revised TP of Rs1,880 (from Rs1,820), rolling forward to Sep’23E EPS.

Sales growth led by double-digit volume growth: Colgate’s revenue increased 12%, with an estimated 10% growth in domestic volumes. Sales witnessed a 2-year CAGR of ~4%, with toothpaste recoding higher growth. Toothbrush sales grew strongly on a yoy basis on low comparables but remained impacted due to lockdowns. Sales were lower qoq due to a higher impact on toothbrush sales and last mile logistics. Promotional intensity was higher during the quarter, resulting in a slightly lower pricing growth. Aggression behind Naturals range continues. Management continues to focus on innovations, providing specific benefits, and GTM initiatives to regain market share and drive category growth.

Gross margin gains higher than expected; ad spends rise sharply: Gross margins were up 300bps YoY (200bps above estimates), driven by a better SKU mix, pricing and low-priced inventory. EBITDA margins improved 90bps to 31% (down 240bps QoQ) on higher gross margins and lower employee cost increase (4.7%). Ad spends were higher by 41% to 13.85% of sales to support the recent launches. Input inflation is largely led by crude and may reduce gross margins ahead. Our forecasts factor in a 100bps decline in EBITDA margins in FY22 due to higher input inflation and step-up in brand spends.

Expect growth to improve from Q2; maintain Buy: After two quarters of improvement in growth trends, the slight miss on Q1 growth is likely to be a one-off impact due to lockdowns. We expect CLGT to recover lost sales and deliver an improvement in growth ahead. Earnings momentum is likely to continue going ahead and may drive upsides to estimates. Maintain Buy with a TP of Rs1,880 (from Rs1,820), rolling forward to Sep’23E EPS.

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