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Revenue underperformance vs. HPC peers continues

Colgate’s Sep-Q performance was disappointing as revenues declined by 6.3% (likely to be weakest sales performance among our HPC coverage) - we est. 7% decline in volumes and lowsingle-digit price/mix growth for the quarter. Volume performance was impacted by: a) Weak demand trends in July/August month (similar to 1QFY26) which was further aggravated by GSTtransition-led impact in September month, b) high base and c) heightened competitive activity. Revenue performance is weaker vs. peers like HUL (saw marginal decline in oral care). Gross margins were better than est. led by benign raw material environment and better mix (premium segment continued to see strong growth momentum). This along with tight control over overhead costs resulted in c.60 bps beat on EBITDA margins. Favourable base along with expected benefit of GST rate reduction and continued strength in premium portfolio, we believe should arrest volume decline and result in recovery in 2HFY26E. While input cost environment remains benign, full impact of inverted tax duty structure (entire portfolio moves to 5% while input costs/services haven’t seen reduction in GST rate) will be seen from Q3FY26 onwards. We marginally cut our est. to factor in GST transition impact seen in Q2FY26. Valuations at 41x/38x FY27/28E are closer to long term averages and restrict downsides. However, rerating from current levels will be contingent on pace of acceleration in sales growth. To that extent, we believe a lot more work needs to be done on driving category growth and portfolio diversification. Roll forward and maintain ADD with TP of INR 2,405 (40x Dec’ 27E EPS)

* Q2 revenue performance weaker vs. est.; continued strength in premium portfolio and GST relief offer optimism on 2H trajectory: Colgate reported 6.3% decline in sales to INR 15.1bn (c.1.4% below estimate). We estimate c.7% decline in volumes for the quarter. While price/mix growth was positive (in low single digits), volume performance was impacted by: a) GSTtransition-led disruption at distributor and retailer level across channels, b) high base (10% sales growth with high-single-digit volume growth in 2QFY25) and c) challenging operating environment. Only silver lining was performance of premium portfolio which continued its strong growth trajectory led by Colgate Visible White Purple. The recent GST reduction from 18% to 5% on its entire oral care is expected to boost consumer confidence. Management anticipates a gradual recovery in performance into 2HFY26E. On the product front, company launched three new body washes under Palmolive’s Moments range.

* Better than envisaged gross margins along with tightly controlled overheads drove marginal EBITDA beat: Gross margin remained resilient, improving by 85bps YoY to 69.2% (better vs. our est. of 68.7%) was aided by benign input cost environment and better mix. Overhead costs were tightly controlled - A&P spend declined 7.3% YoY (down 15bps YoY as % to sales), other expenses were down c.2% YoY, while staff cost remained flat on YoY basis. Resultant EBITDA declined by 6.4% (similar to sales performance) to INR 4.7bn with EBITDA margins being flat YoY at 30.9% (60 bps higher vs. JMFe of 30.3%). Reported PAT declined by 17.1% YoY to INR 3.3bn (c.1% below our est.) due to sharp drop (c.80% YoY) in other income. The base year’s higher other income was attributable to interest on tax refund of INR 565mn. Adjusting for this, PAT decline would be c.7%. Going ahead, while input cost environment remains favourable, impact of inverted duty structure on margins will be seen from Q3 onwards. Company’s board declared a first interim dividend of INR 24 per equity share for FY26, aggregating to a total payout of INR 6.5bn.

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