Buy Colgate-Palmolive Ltd For Target Rs.1,640 - Emkay Global
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* Colgate delivered a muted performance in Q3FY22, with sales growing by 4% to Rs12.8bn, marginally lower than our estimate. EBITDA/PAT grew by 2-3%, in line with our estimates.
* Slow demand trends impacted growth in the quarter. A consistent innovation pace in oral care should drive better growth rates as demand picks up. Though the portfolio expansion into face cleansing is a positive move, premium pricing could limit the overall opportunity.
* Margins in Q3 were lower due to high comparables and the moderation in pricing impact as a result of high promotional intensity. Input inflation appears to be moderate. We forecast flat margins in FY23 and a marginal 20bps gain in FY24.
* We cut FY23/24 estimates by 5%, factoring in the slow growth. After the recent correction, valuation at 35x FY23E EPS prices in the near-term weakness. Retain Buy with a revised TP of Rs1,640 (Rs1765 earlier) now valuing it at 37x earnings (vs 40x earlier) factoring an increase in COE and rolling over to Mar’24E.
* Sales growth muted at 4%; indicative volume growth stands at 3%: Sales growth slowed down to 4% in Q3FY22 due to weak rural demand. On a 2-year CAGR basis, sales growth stood at 5.6%. Volumes grew by 3%, whereas pricing growth was lower due to higher promotional intensity. The near-term demand outlook remains weak, with rural demand being soft. According to management, the slowdown was present across segments, with naturals also witnessing a deceleration.
* Margins decline on high comparables: Gross margins declined by 320bps from peak Q3FY21 margins. Sequentially, margins were down 20bps. EBITDA margin was managed well, with a 24% cut in ad spends. Ad spends were at 12% of sales vs. a high base of 16.2% in Q3FY21. The increase in overheads was higher, with staff/other overheads up by 16%/8%. Input price inflation remains moderate, which should sustain current gross margins. We forecast flat margins in FY23, and a 30bps expansion in FY24.
* Innovations and portfolio expansion yet to improve growth: Colgate has been consistent in innovations –(launched Colgate Gum Expert and Colgate RecyClean in the quarter), which should drive better growth as demand trends improve. The company has announced its entry into the face cleansing category under the Palmolive brand. The product range includes face foams, masques, and scrubs, all created with natural ingredients. We see the portfolio expansion as a positive move, but the product pricing seems to be very premium, and thus offers only limited growth opportunity. For instance, the foam face wash is priced at Rs425/100ml, which is ~2-3x of mainstream brands.
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