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Competitive pressure to limit gains from GST 2.0

Quick Pointers:

? 1Q26 toothpaste volumes de-grow ~3.0%, demand pressures persist in urban mass end of the market

? GST led to price reduction to improve near term demand scenario, but competition is a key factor to watch out for

CLGT 2Q26 was mixed with slight miss on revenue as sales remained impacted amidst GST rationalization, sustained competition and urban demand pressure at mass end of the market. However, 80bps GM expansion resulted in PAT beat as stable RM and price increase of previous quarter came in handy. Near-term outlook remains cautiously optimistic led by expected demand pickup amidst GST 2.0 and favorable macro environment

CLGT’s long term drivers are intact led by 1) driving core toothpaste brands and 2) premiumization through science-backed innovations (driving growth in urban premium segments), however, heightened competitive pressure remains a key concern. While GST 2.0 might provide some initial volume uptick on a low base from 3Q/4Q26 onwards, we expect volume growth to settle at mid-single digits with 7-8% sustainable PAT growth in the long term given little scope to expand margins from current elevated levels. We estimate 8.4% EPS CAGR over FY26-28. We value CLGT at 44x sept27 EPS and assign a target of Rs2534 (Rs2453 earlier on Mar27 EPS). Retain Hold.

Sales de-grew 6.2%, EBITDA Margins contract by 9bps YoY: Revenues declined by 6.2% YoY to Rs15.2bn (PLe: Rs15.3bn). Gross margins expanded by 91bps YoY to 69.5% (Ple: 67.5%). EBITDA declined by 6.4% YoY to Rs4.7bn (PLe:Rs4.5bn); Margins contracted by 9bps YoY to 30.6% (PLe:29.8%). A&P spends contracted by 18bps YoY to 14.8%. Adj. PAT declined by 7.2% YoY to Rs3.3bn (PLe:Rs3.2bn). Volumes declined by ~3% on sustained competition and trade destocking given GST rate cut and prolonged monsoon impact.

Key Highlights: 2Q26 impacted by GST 2.0

* Rural continues to grow faster than urban, although the growth is not accelerating but is steady. Urban demand pressure seems more in mass end with brands like Colgate strong teeth. Max fresh and Active salt reporting slower growth. Premium segments continue to grow in double digits.

* GST on entire oral care portfolio reduced from 18% to 5% to likely boost consumer confidence in near to medium term. CLGT passed on entire benefit of GST 2.0 to consumers from effective date (22nd September)

* Transitory disruption was witnessed at distributor and retailers’ level across channels amidst GST rate revision; however, company expects gradual recovery from Q3 onwards as prices stabilize.

* Premium portfolio continued its strong growth momentum led by Colgate Visible White Purple and advanced whitening toothpaste. CLGT introduced Palmolive's newest Moments body wash range. The collection features unique body washes infused. MaxFresh Mouthwash Sachet Stick introduced in Fresh Tea flavor, targeting on-the-go freshness needs.

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