Buy Colgate-Palmolive Ltd For Target Rs.1,820 - Emkay Global
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Steady growth; margin beat on lower ad spends
* Colgate reported a steady performance in Q4, with sales growing 20% to Rs12.8bn at a two-year CAGR of 5.5%, which is slightly above most peers. EBITDA and APAT grew 60% and 63%, respectively, and came in 11% ahead of estimates on lower ad spends.
* The company’s performance is slightly better though overall market share is yet to see any meaningful recovery. Early success of new innovations, pick-up in premiumization trends and market share gains in emerging channels (MT/Ecom) appear positive.
* Margin expansion was driven by pricing and better SKU/product mix. With an increase in input inflation, we expect pricing growth to continue but forecast flat margins in FY22-24E after strong gains in FY21.
* We remain positive on Colgate and expect management actions on innovations/GTM to improve growth and market share. Valuation at 35x FY23E EPS is reasonable and offers rerating potential. Maintain Buy with TP of Rs1,820 (40x Jun-23E EPS) vs. Rs1,800 earlier.
Double-digit growth across categories; urban demand recovers strongly:
Sales grew 20%, with domestic volume growth estimated at ~16%. Sales CAGR over two years stood at 5.5%, marginally better than most peers. Management highlighted double-digit growth across categories, indicating a pick-up in toothbrushes, which were impacted in H1. Toothpaste growth was marginally higher at 20%+. Urban growth saw a comeback in Q4, while rural growth was stable. For FY21, sales grew 7%, with domestic growth of 8%+.
Colgate has gained share in emerging channels of MT/Ecom and has witnessed encouraging response to innovations including Visible White (gained 80bps/120bps market share in MT/E-com), Vedshakti mouth spray (equivalent to 1% toothpaste SOM) and Gentle toothbrush (0.8-0.9 share in MT in three months). Recent launches include Colgate Magik (kids segment) and Slimsoft Naturals. Management continues to focus on innovations, providing specific benefits, and GTM initiatives to regain market share and drive category growth.
Margin beat driven by lower ad spends and better mix:
Gross margins were up 300bps, driven by better pricing as well as improved SKU and product mix. EBITDA margins improved 830bps to 33% (up 280bps qoq) on favorable comparables and lower A&P spends, which declined to 11.6% of sales from 14.5% of sales in Q4FY20. Full-year ad spends normalized at 12.9%, similar to previous years (FY20 saw a high of 13.8%). With an increase in input inflation, we expect margins to moderate slightly, and forecast flat margins for FY22-24E.
Steady growth with reasonable valuations; maintain Buy:
Market share is yet to see any meaningful recovery but overall performance has been stable. Management actions to improve growth appear positive. Valuation at 35x FY23E EPS appears reasonable and can rerate with market share gains. Maintain Buy with a TP of Rs1,820, based on 40x Jun-23 EPS.
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