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Capitalizing on solid margin profile to fund growth

We recently participated in the Analyst/Investor Meet held by Colgate-Palmolive (India) Ltd. (CLGT). Highlights at a glance: 1) CLGT outperformed peers on growth in recent times, 2) Toothpaste category growth softening as well in urban areas, 3) Average Selling Price (ASP) in recent times driven by mix improvement. As inflation rises, price actions to contribute as well, 4) Innovation, packaging upgrade, accessible sku’s and high decibel campaign to aid growth, 5) Margin profile strengthened above normative levels in recent times; CLGT to leverage strong margins to invest behind brands/innovations and drive topline growth. 6) It is also looking to aggressively expand Personal Care portfolio. While there is 3.6%/4%/3.5% cut in our FY25E/FY26E/FY27E EPS, recent stock correction (down ~22% from peak) leads to one notch upgrade in our rating to ADD with a revised target price (TP) of Rs3,375 (Rs3,500 earlier). Market share improvement & update on diversification being explored in personal care will aid further rerating.

Highlights from the Analyst Meet:-

* Outlook: CLGT grew 1.6x ahead of FMCG peers in FY24; 2.4x in 1HFY25. In near-term, company is seeing some macro challenges. Unlike recent quarters, CLGT expects balanced growth going forward as inflation is going up and price changes will pick-up. Last year margins were outside of range, hence company expects it to moderate now and is likely remain range bound going forward.

* Rural vs Urban: Rural growing ahead of urban over the last two quarters, but the pace of rural growth is now plateauing. Toothpaste category growth in urban areas have seen softening but CLGT reckons this as a near-term concern. After a long time, rural outpacing urban in toothbrush growth.

* Improvement in realizations: Toothpaste average realization per kg increased by 13% over 2022-2024YTD. Over the last one year the ASP growth was led by mix improvement than MRP change. Going ahead, with inflation going up, pricing growth is expected to catch-up.

* Margins: Management believes margin profile in recent times have strengthened above normative levels. Hence, it will leverage the strong margin delivery to invest on brands/innovation and drive topline growth and also to increase awareness.

* Oral Health Movement: To improve and drive oral health, CLGT has recently launched their biggest initiative “Oral Health Movement”. It is evolved from the earlier model used in ‘Oral health month’. It is using technology (smartphone penetration) to drive dental screening. As part of the campaign, 800mn packs will have the QR code, 550mn+ campaign reach and 500+ on-ground locations. Management believes, awareness increase should eventually lead to growth in market size.

* For the flagship brand in premium portfolio i.e., Colgate Total, company has rolled out new packaging. CT is growing 3x vs the toothpaste category growth. To drive accessibility, CT is now made available at Rs80 price pack as well. The pricing is now 0.77x in Dec’23 and distribution has grown 10x from 30k to 300k stores. It has also launched anti-Tartar variant (biggest variant globally) across major e-com platforms.

* Personal care: PC has grown in strong double digits. CLGT plans to remain focus on body and handwash segment. Management highlighted it has aggressive plans and an interesting innovation pipeline. It is also looking at other parent brands to launch in India which has a point of difference.

* Whitening: CLGT is also creating desire for whitening as penetration in India is sub 2%. Whitening portfolio is seeing strong double-digit growth. Company believes the opportunity for innovation is very high in this category. It has recently launched Purple tech whitening product which has received tremendous early response. Science here is the colour technology/active oxygen tech. It has already garnered 3% share in Ecom and is available across MT now. Purple tech: Growth (2x of company), share (+130bps vs company) and margin accretive (~200bps higher)

Initiatives for Core: Company has rolled out new piece of communication for Colgate Strong Teeth with enhanced packaging based on insight that 1 out of 2 people are eating something at every moment and snacking erodes enamel. To improve access, CLGT ST is now also available at Rs20. Maxfresh is now also available in blue variant for key areas.

* Lead Toothpaste category growth: As toothpaste penetration has reached almost 100% but consumption is still low in India at ~220gms per year vs 440gms in Thailand and 380gms in Malaysia. Still 80% urban Indians do not brush twice a day and 55% rural Indians don’t brush daily. Also, based on a recent study, 9 out of 10 Indians have oral health issues. Half of the visits to dentist gets converted to extraction of tooth. Hence to improve and drive oral health, CLGT has recently launched their biggest initiative “Oral Health Movement” and also scaling up BSBF.

* Bright Smiles, Bright Future (BSBF): Scaling to even bigger level. New partnerships with states like UP, Goa and AP added (representing 24% of India’s population). Touchpoints increased to 10mn children from 5.2mn in 2023.

* Continued investment on brush twice a day through partnerships and activations.

* Toothbrush: Toothbrush handles per capita per year is 1.2 in India vs 2 in Thailand. Rural consumers replace new toothbrush every 15 months. This year has been the best growth in toothbrush. It has grown at 1.4x the category growth in YTD CY24. The company gained market share and now is leader in super premium segment. 78% of the category is still below Rs40 price point. CLGT aims to up pricing and drive replacement for toothbrush.

* Distribution: Direct reach now stands at 1.7mn outlets with total reach of ~7mn outlets. Distributor inventory at 0.9x in Sep’24 compared to 2022. There is 15% increase in assortment score in 1.7mn stores which has ML Led assortment model. Using AI/ML demand forecasting to also lower company inventory and increased distributor’s sales. YTD CY24 growth for AmaZing (IR based AI model to drive MT 5Ps) stores is 2x of Non-AmaZing stores.

* Q-commerce: The channel is share and margin accretive. It is advantageous to incumbent players like CLGT since it sells products which are at the highest velocity.

* Advertising spends: Advertising spends increased by 14% in 1HFY25 (representing 14.3% of net sales). CLGT will continue to drive consumption from campaigns like Oral care movement and BSBF. It believes moving consumer behaviour to brushing twice a day will be slow and will require high ad spends.

* Premium flagships are 1.5x in pricing versus the company average. New launches are also at higher price levels.

* The company is not seeing competitive intensity in the near term. Relative market performance good this year. CLGT growing competitively.

* Balance growth aim stays. CLGT has seen that 140-170 indexed pricing leads to better growth. CLGT is putting effort to bring products in that range. 12-13% oral care market sits above Rs140 price index, compared to other personal care categories which are at 25%. So, the potential for growth is robust led by pricing.

* There are few consumers who look at Naturals as a segment. Consumers are rather looking at benefits.

* 100% of Colgate toothpaste tubes by volume to be fully recyclable by the exit of FY25. Tech for this has been open sourced.

* As per Kantar track, for YTD CY, CLGT now has 70% ‘top of mind’ score. 63% score as ‘brand of first choice’.

* “Funding The Growth” savings was 5.8% of sales in CY24 ($11mn) which was re-invested in Product superiority, Packaging & Sustainability.

* Most of the Personal care products are now locally sourced compared to being imported in the past.

* 90% of the portfolio have seen a packaging upgrade.

* CLGT believes it has got the pricing right on toothbrush hence doing well vs Oral B.

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