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Sustainable growth entails more levers (Personal care)

About the stock: Colgate-Palmolive (India) (CPIL) is the largest oral care company in India. The company has more than 50% market share in the toothpaste category. The major brands include Colgate Dental Cream, Colgate Total, Colgate Max-Fresh. With the changing consumer preference for naturals products, the company is focusing on growing Colgate Vedshakti brand. Recently, it has launched toothpaste for Diabetics, Colgate Visible White O2, Palmolive range in face cleansing category

* Colgate has distribution reach of 6.5 million outlets. The company commands one of the highest gross margins in the industry and spends ~13% of sales on marketing to support existing brands and new launches

Q1FY23 Results: Colgate reported dismal set of numbers with 7.1% dip in earnings

* Sales were up 2.6% YoY led by pricing growth; volume seen de-growth

* EBITDA was at | 325.7 crore, dipped by 8.3% YoY, with margins at 27.2%

* Consequently, adjusted PAT was at | 216.6 crore (down 7.1% YoY)

What should investors do? Colgate’s share price has underperformed FMCG index in last five years with of 47% (from | 1070 in July 2017 to | 1564 in July 2022)

* We expect commodities to cool off in next few months & margins, volumes to recover in H2FY23 with grammage reduction in smaller SKUs. However, CPIL require more lever for long term sustainable growth

* We maintain our Hold rating on the stock

Target Price and Valuation: We value the stock at |1690, valuing the business at 38x FY24 earnings.

Key triggers for future price performance:

* Innovation & new launches in whitening toothpaste, naturals, Ayurveda & therapeutic toothpaste category help sustaining moderate volume growth in longer run. However, near term growth is only contributed by price hikes

* CPIL saw 460 bps operating margin expansion in FY21. With sharp increase in packaging cost, operating margins have peaked out in the medium term

* The company has launched products in face cleansing category. We believe CPIL require aggressive approach to growth personal care category given oral care category has been saturated with 95% penetration

Alternate Stock Idea: Besides CPIL, we like Tata Consumer in our FMCG coverage

* Strong innovation & premiumisation strategy in salt, tea, Sampaan & Soulful in Indian market expected to drive sales & margins

* We value the stock at | 910 with a BUY rating

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