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Volume trajectory continues to remain subdued

* CLGT’s gross margin returned to normative levels in 4QFY23 and EBITDA margin improved ~550bp sequentially (500bp beat).

* Ad spends are expected to remain high in the coming quarters. CLGT has passed on some benefits of lower RM prices to consumers. Growth next year would be led by volume rather than value.

* The company will continue to focus on innovation, productivity and premiumization to revive growth. With a cautious near-term outlook on demand, we reiterate our Neutral rating on the stock.

In-line sales; margin better than expectation

* CLGT reported flat sales YoY at INR13.5b (est. INR13.8b).

* We believe that domestic volume remained flat YoY.

* EBITDA grew 5% YoY to INR4.5b (est. INR3.9b).

* PBT grew 8.9% YoY to INR4.3b (est. INR3.6b).

* Adj. PAT grew 9.1% YoY to INR3.2b (est. INR2.7b).

* Gross margin was flat YoY at 66.9% (est. 66.4%).

* As a percentage of sales, stable staff costs at 6.7% (+10bp YoY), stable other expenses at 16.2% (+20bp YoY) and lower ad-spends at 10.6% (-70bp YoY) led to EBITDA margin expansion by ~50bp YoY to 33.5%.

* FY23 sales/EBITDA/Adj. PAT remained flat YoY at INR52.3b/INR15.5b/ INR10.6b.

Key highlights from management commentary

* The company has four strategic pillars: 1) lead in the toothpaste category in terms of volume and grow the core, 2) premiumization, 3) lead the toothbrush & devices category, and 4) build personal care.

* Only 20% urban households brush twice a day, having scope for expansion.

* EBITDA margin may be affected in 1QFY24 by higher Ad spends due to new product launches.

* CLGT re-launched Colgate strong teeth in May’23 as it gives both value and volume growth. It is patented with arginine technique and offers the best in cavity protection. The product has 1.2x penetration in rural areas. In addition to cleaning, it nourishes teeth.

* The company has reached 170mn children through ‘Bright smiles Bright Future program’ and targets to add 10m more by 2030

Valuation and view

* There are no material changes to our FY24/FY25 EPS estimates.

* The sales/EBITDA/PAT CAGR for the five-year period ending in FY23 stood at 4.5%/6.8%/9.2%. There seems to be no revival in overall growth.

* As we pointed out in our analyst meet note in Dec’22, with high oral care penetration as well as a loss of market share to herbal players, volume growth has been elusive for CLGT for several years now. Premiumization in general trade, as well as traction in personal care, has been quite slow. While growth initiatives under the new CEO are welcome, we do not see any material change in business prospects over the near to medium term.

* With weak revenue and earnings growth likely to sustain going forward, any rerating of the stock is unlikely, with a two-year earnings CAGR of ~12% (ending FY25). Our target multiple of 33x FY25E EPS leads to a TP of INR1,575. We reiterate our Neutral rating on the stock.

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