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In-line performance

Colgate Palmolive’s (Colgate) Q3FY22 revenue (up 3.9% YoY) was in line with our estimate, while EBITDA (up 2.7% YoY) and PAT (up 1.6% YoY) came in ahead of our estimates. Colgate delivered double digit 11.9% revenue and 20.4% EBITDA growth on a two-year basis. Overall, volume grew by about 3% YoY on a base of 5%. Gross margins compressed 316bps due to inflation, while EBITDA margin compressed only 36bps YoY due to cost initiatives and cut in ad spends.

Overall, we are enthused to see a strong and consistent innovation pipeline. However, we would prefer to see consistent market share gains before revisiting our recommendation. We maintain ‘HOLD’ with a target price of INR1,570.

Decent performance, inflation pressure remains

What we like: EBITDA and PAT came in ahead of our estimates. Colgate was able to deliver double digit growth in revenue and EBITDA on a two-year basis, despite macro issues like slowing rural demand, inflation and the pandemic. EBITDA margins fell only 36bps YoY despite inflation, due to cost control. Company has launched innovative new products using natural ingredients.

What we do not like: Gross margins saw 316bps YoY compression due to high inflation in the environment. Although overall pricing was about 5%, the translation to reported numbers is only 1% due to high promotional intensity.

Strong innovation pipeline

The company has made some innovative, natural based and sustainable launches during the quarter. In oral care, the company launched Colgate Gum Expert, which includes natural ingredients like turmeric, which can help with gum bleeding and infection. Colgate has also launched a new Palmolive range of face care products like masques, face foams and scrubs and includes natural ingredients. Colgate RecyClean is a first of its kind toothbrush with bristles that are plant derived and the handle is made from recycled plastic.

Outlook and valuations: Steady improvement; maintain ‘HOLD’

We expect Colgate’s innovation funnel and brand investments to keep flowing, which should aid revenue growth. Considering the rural slowdown and strong inflationary environment, we are lowering the TP to INR1,570 (from INR 1,780). We retain ‘HOLD/SN’. The stock is trading at 35.4x FY23E EPS.

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