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No surprises. Another year, another weak quarter, as usual

2QFY23 revenues growth of 2.6% YoY was again underwhelming but not unexpected. Gross margin pressure intensified (down 310bps YoY and 260bps QoQ to 63.8%) with sharp cut in staff costs and ad-spends leading to a decent EBITDA margin print of 29.4%.

We believe sustained weakness for the past many quarters highlight the need for a major strategy refresh. Consensus (including us) has three expectations from CLGT – (1) drive growth in natural segment, (2) play the role of a category leader and drive category usage (per capita consumption) and (3) diversify in other home and personal care categories. Expectations from the new CEO are high (not factored in stock price though)

We believe weak macros have likely delayed the execution on some of the important markers. Potential to diversify the portfolio outside of oral-care is the only reason, for now, for our ADD rating.

Growth continues to be weak : Net sales were up 2.6% YoY to Rs13.9bn, broadly in-line with our estimate. The top-line performance continues to underwhelm due to macro and category challenges. Management has highlighted demand challenges in rural with expectations of improvement in the coming quarters. It has highlighted (1) better performance in MT and e-commerce channels and (2) better trajectory in core brands. While Colgate has enhanced focus on some sub-categories and new launches, the uptick in revenue is still not visible

Margin pressure worsens : Gross margins contracted 310bps YoY to 63.8% - lowest print in 20 quarters. The (more) concerning part was the 260bps QoQ contraction. While there is some softening in select raw materials, most companies still have high-cost inventories. Margins could have also been impacted possibly by adverse mix (YoY). EBITDA margin came in at 29.4% on the back of 10% YoY and 15% YoY cut in staff costs and ad-spends, respectively. EBITDA was up 2% YoY. Recurring PAT was up 3% YoY to Rs2.8bn. We do expect some increase in adspends to support its new launches

Valuations and risks : We largely maintain our earnings estimates; modelling revenue / EBITDA / PAT CAGR of 6 / 6 / 6 (%) over FY22-24E. Maintain ADD with DCF-based unchanged target price of Rs1,750. Key downside risk is lower-thanexpected market share gains.

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