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Our SELL rating on Colgate was a factor of weak topline delivery and restricted diversification in the business. Q1FY24 results surprised positively, with 11% topline growth — toothpaste revenue grew in healthy double digits. Earnings growth was a robust 35% YoY, aided by EBITDA margin expansion of 440bps YoY (driven by the 200bps expansion in gross margin and the 175bps easing in other operating overheads). We attribute the strong Q1 show to steady pricehikes (despite benign RM), relaunch of Colgate Strong Teeth, low base effect, and one-offs in other expenses. We expect the 22-Aug-2023 Analyst Meet to grant a better perspective on Q1FY24 results. We bump up our FY24-26E earnings by ~4%. Based on this, along with higher valuation multiple of 35x (vs 33x earlier), we raise Jun-24E TP to Rs1,720 (Rs1,560 earlier); retain SELL.

Strong topline delivery, sustenance of momentum critical for valuations

Contrary to Street and our expectations of a 6-7% topline growth, Colgate reported a strong 10.8% YoY growth in Q1FY24. Domestic revenue grew 12.3% YoY, aided by high double-digit growth in the toothpaste category. We see domestic revenue benefitting from weak delivery in Q4FY23 (2-3% volume decline in Q4FY23, on a low base of 3% decline in Q4FY22), as thrust was to re-launch its key Colgate Strong Teeth offering in Q1FY24. In the absence of Management access, it is tough to measure the trade stocking impact in the quarterly numbers. We estimate a mid-single-digit volume growth in Q1FY24, with a high single-digit volume growth in toothpaste. We nudge up our FY24- 26E topline estimates by ~2%, to factor-in the higher price-hikes and the expected recovery in rural demand.

Lower other expenses drove the Q1FY24 margin beat

Gross margin delivery was on expected lines at ~68.4%, up by 210bps YoY. Flat YoY absolute other expenses sprung a surprise. On the back of lower other operating expenses (declined 175bps YoY to 15.9%, as a % of sales), EBITDA margin expanded by 440bps YoY to 31.6%. Earnings grew 35% YoY in Q1FY24, benefitting from the lower tax rate. Capturing the pricing actions, we raise our FY24-26E EBITDA by ~4%. Overall, we see the company clocking 7% sales CAGR and 11% earnings CAGR over FY24-26E.

The recent re-rating builds a case for healthy earnings; retain SELL

On the back of improved topline and margin delivery, we increase our FY24-26E earnings by ~4%. We also push up our stock valuation multiple, from 33x earlier to 35x now (~10% discount to the 10-year historical average forward PER of 38x). On account of these changes, our Jun-24E TP stands higher at Rs1,720/share, from Rs1,560. We await Management clarity on the Q1FY24 performance, in the upcoming Analyst Meet scheduled on 22-Aug-2023. We also seek an update on the core business market share, performance of the premium portfolio, and initiatives related to business diversification.

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