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Higher rural growth helped 5% volume growth

Colgate’s Q3FY25 print was in-line with our estimates; revenue grew by 4.7% YoY while EBITDA/PAT declined by 3.1%/2.2% YoY. Despite soft demand in urban market, domestic sales grew by 3.2% YoY backed by ~5% YoY volume growth, which represents soft demand (particularly in urban market). We like CLGT’s focus on product superiority led by science- based innovation, category led growth along with premiumisation story. The tech-enabled Oral Health Movement was launched at significant scale. Management believes that its strong innovation pipeline would help boost growth. During Q3, the company introduced MaxFresh Sensorial range on e-Commerce channel. Gross margin declined to 69.7% (-228bps) due to change in product mix along with higher input costs. Although other expenses increased (+15.1%), drop in Ad-spends as a % of sales by 95bps to 13.8% and lower employee exp. (-0.9%) led to EBITDA margin falling to 30.6% (-249bps). The management has given a cautious outlook for the short term while long term growth outlook is intact. We have tweaked earnings and maintain BUY, with a revised DCF-based target price of Rs3,215 (implied 47.8x FY27E EPS)

Volume growth of ~5% despite soft demand particularly in urban market

CLGT’s Q3FY25 revenue grew by 4.7% YoY to Rs14.5bn. Domestic sales grew by 3.2% YoY, led by ~5% YoY volume growth. We note that core category growth would be driven by Strong Teeth, Max Fresh and Active Salt portfolio. Further, science based superior/premium portfolio forming ~15% of sales, led by Colgate Total and Whitening portfolio (Active Oxygen Tech) continue to expand distribution, clocking 3x category growth. CLGT has embarked on the journey of driving category consumption using ‘Oral Health Movement’ initiative: (1) free AI-led dental screening – 800mn+ packs with QR codes and free dentist consultation provided by 50K Dentists (2) BSBF partnership covering 200 cities and ~10mn children across 23K schools and (3) brush twice a day campaign. The management believes that strong innovation pipeline would help boost growth in the medium to long term. During Q3, the company introduced MaxFresh Sensorial range on ecommerce channel. The management has given a cautious outlook for the short term while long term growth outlook is intact

Lower gross margin and higher other expenses lead to lower EBITDA margin

In Q3FY25, CLGT’s gross margin declined by 228bps to 69.7% due to change in product mix along with higher input costs. Althoughother expenses increased (+15.1%) decline in employee expenses (-0.9%) and ad spend (-2.0%) pushed EBITDA margin to 30.6% (-249bps). Ad-spends as % of sales declined by 95bps YoY to 13.8% vs. 14.7% in Q3FY24. CLGT has introduced the MaxFresh Sensorial range in e-Commerce, which is a combination ofrefreshing power with fun &flavor. PAT was down by 2.2% YoY despite higher other income (+10.7%) and decline in interest expenses (-26.5%).

Valuation and risks

We reckon CLGT’s growth will be driven by: (1) category development by driving awareness through Oral Health movement (2) diversifying product portfolio and growing beyond oral care (3) driving frequency of consumption and (4) further penetration in rural markets. The management aims to drive oral category penetration by retaining leadership using product superiority and innovation led premiumisation. With a strong distribution network (7mn), CLGT has guided for volume led growth with healthy mix between pricing/mix led realizations. We expect a gradual demand recovery in urban markets and strong recovery in rural to lift CLGT’s performance. With focus on cost savings, we expect stable margins despite higher adspends and investments to support new launches. We cut our earnings for FY25E/FY26E by 7.3%/8.0% and maintain BUY with a revised DCF based target of Rs3,215 (implied 47.8x FY27E EPS). Risks: weakness in rural demand leading to decline in volume for toothpaste category and rising inflation in key RM/PM.

Valuation

We reckon CLGT’s growth will be driven by: (1) category development by driving awareness through Oral Health movement (2) diversifying product portfolio and growing beyond oral care (3) driving frequency of consumption and (4) further penetration in rural markets. The management aims to drive oral category penetration by retaining leadership using product superiority and innovation led premiumisation. With a strong distribution network (7mn), CLGT has guided for volume led growth with healthy mix between pricing/mix led realizations. We expect a gradual demand recovery in urban markets and strong recovery in rural to lift CLGT’s performance. With focus on cost savings, we expect stable margins despite higher ad-spends and investments to support new launches. We cut our earnings for FY25E/FY26E by 7.3%/8.0% and maintain BUY with a revised DCF based target of Rs3,215 (implied 47.8x FY27E EPS). Risks: weakness in rural demand leading to decline in volume for toothpaste category and rising inflation in key RM/PM

P/E mean and standard deviation

EV/EBITDA mean and standard deviation

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