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Growth momentum improving

* Colgate’s domestic sales growth was better at 10%, driven by 5% volume growth. Sharp decline in exports (~5% of sales) impacted reported growth at 7.4%. Stronger margins led to higher PAT growth of 25%, beating estimates by 5%.

* Sequential improvement in volume/sales growth is positive. Though volume growth is still at subdued mid-single digit, stronger rural demand and Colgate’s increased innovation and distribution efforts can drive more improvement ahead.

* Margins have expanded strongly, owing to being input prices and price/mix. Outlook remains stable as increase in input inflation may be offset by moderation in ad spends, which increased sharply. We estimate flat operating margins during FY21-23.

* Factoring in the earnings beat, we raise estimates again by 3-4% for FY21-23. Valuations at 36x FY23E earnings appear reasonable. Maintain Buy with a revised TP of Rs1,800 (from Rs1,700) based on 40x Mar’23E EPS.

Domestic sales growth improves to 10%, with volume growth of 5%: Colgate’s revenue increased 7.4% on the back of strong 10% growth in domestic sales, driven by 5% volume growth. Sequential improvement in volumes (vs. ~2% in Q2) was driven by toothpastes and personal care, with toothbrushes recovering to positive territory. Pricing was also higher on account of better mix and price increases. Exports previously 5% of sales declined sharply, dragging down overall revenue growth. Colgate stepped up its innovation pace by entering new categories, including mouth spray and oil pulling under its Vedshakti brand. Aggression behind the Naturals range continues with the launch of Super Flexi Salt and Zig Zag Turmeric toothbrushes. Rural demand continues to be strong which should drive further improvement in volumes.

Gross margin gains higher than expected; ad spends rise sharply: Gross margin was up 400bps, led by lower input prices and higher price/mix. EBITDA margin gains were lower at 250bps due to a 38% increase in ad spends and 13% increase in employee costs. Ad spending was stepped up sharply to support the higher number of new launches during the quarter. Margin outlook remains positive on cost-saving measures and moderation in ad spending ahead.

Valuations reasonable; maintain Buy: We believe that the increased innovation pace and higher rural demand can drive further improvement in volume growth. Low comparables in the next two quarters will benefit. We increase FY22-23 earnings estimates by 3-4%. Valuations at 36x FY23E earnings appear reasonable. Maintain Buy/OW in EAP with a revised TP of Rs1,800 (from Rs1,700) based on 40x Mar’23E EPS.

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