IGI Logo

Sales growth remains tepid; outlook weak

* CLGT’s 2QFY22 result was in line with our estimates. Two-year average sales growth, at 5.2% in 2QFY22, continues to remain in the 4-6% range seen in recent quarters, with little indication of an improvement, despite consistent advertising spends. With: a) the launch of the Non-Oral Care portfolio, and b) investments under the ‘brush twice a day’ campaign seemingly on the back burner, it is unlikely to return to double-digit sales growth seen over FY08–15 anytime soon. We maintain our Neutral view on weak topline growth, rising material cost pressures, and limited scope for price hikes.

* There is no evidence that the company is regaining lost market share in the core Oral Care business. At 13.7% of 2QFY22 sales, advertising spend increased by 15.7% sequentially, which we believe needs to sustain over a longer period of time to revive sales growth.

* We had downgraded the stock to Neutral post its 4QFY21 result. While valuations at 38.4x FY23E EPS may appear inexpensive v/s its Staples and Discretionary peers, mid-single-digit PBT and PAT CAGR do not warrant a change in our view. We maintain our Neutral rating.

Performance in line with our estimates

* Net sales grew 5.2% YoY to INR13.5b (in line) in 2QFY22. EBITDA/PBT/adjusted PAT declined by 2.1%/2.2%/1.8% YoY to INR4b/INR3.6b/INR2.7b, which was in line with our estimates. Two-year average sales/EBITDA/adjusted PAT growth stood at 5.2%/12.3%/5.2%.

* Gross margin contracted by 130bp YoY to 66.8% (est. 67.9%).

* CLGT is likely to have posted domestic volume growth of 4% YoY (est. 5%) in 2QFY22.

* As a percentage of sales, higher staff costs (+20bp YoY), ad-spends (+90bp YoY), and lower other expenses (-20bp YoY) led to an EBITDA margin contraction of 220bp YoY to 29.6% (est. 29.3%).

* Absolute ad spends rose 12.7% YoY and 15.7% sequentially in 2QFY22.

* Sales/EBITDA/PAT grew 8.2%/5.4%/6.4% YoY to INR25.2b/INR7.6b/INR5b in 1HFY22.

* The company has declared an interim dividend of INR19/share.

Highlights from the management commentary

* Overall penetration trends remain strong and are seeing favorable trends on a sequential basis.

* Recent innovations like toothpaste for diabetics, Vedshakti mouth spray, and the entire Gentle range of toothbrushes continues to gain traction with consumers across platforms.

* The management continues to deploy new content that engages consumers to help it continue its trajectory.

* CLGT’s go-to-market approach continues to see the adoption of new business models and approaches as the management looks to enhance its presence across platforms.

Valuation and view

* Changes to our model have led to a 5.5% reduction in our FY23E EPS. The EPS CAGR of 4.1% over FY21-23E does not offer much scope for optimism.

* We had downgraded the stock to Neutral after its 4QFY21 result. The cornerstones of our earlier optimism on improved topline growth in CLGT were: a) new launches in Oral Care, b) a potentially higher play in Naturals (38-39% in the category, where CLGT was significantly under-indexed), c) new launches in non-Oral Care (~2% of sales currently v/s around half the sales for the parent), leveraging on CLGT’s extensive distribution reach, and d) the implementation of the ‘brush twice a day’ campaign. However, none of these initiatives have panned out over the last few years.

* With weak topline and earnings growth likely to sustain going forward, valuation at 38.4x FY23E EPS appears fair. We assign a value of 40x Dec’23E EPS to arrive at our TP of INR1,690/share. We maintain our Neutral rating.

To Read Complete Report & Disclaimer Click Here

For More Motilal Oswal Securities Ltd Disclaimer http://www.motilaloswal.com/MOSLdisclaimer/disclaimer.html SEBI Registration number is INH000000412

Above views are of the author and not of the website kindly read disclaimer