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Unchanged volume trend; margins at all-time high

* Colgate (CLGT) delivered a healthy price-led 8% YoY revenue growth (est. 6%). However, overall volumes experienced a marginal decline (est. +2%). The value growth of toothpaste was in double-digits, while toothbrushes posted YoY decline (weak volume, unfavorable mix). Volume growth for toothpaste was flat to positive. Despite numerous product innovations and marketing efforts, the rebound in volume remains uninspiring.

* The divergence between naturals and traditional oral care products was negligible industry-wide. Despite oral care being less price-sensitive compared to other categories, CLGT implemented a price hike, particularly in the premium segment, by the end of 2QFY24 (mainly in premium) in this market environment.

* Benefiting from softening raw material costs and a revenue growth driven by higher prices, CLGT achieved a record gross margin, reaching 72.2% (up 630bp YoY). In line with the industry trend, the A&P spend was high at 20% YoY. Despite this, CLGT experienced a sharp 550bp YoY expansion in the EBITDA margin, reaching 33.5%. EBITDA grew 30% YoY (-5% was the base).

* We anticipate challenges in FY25, considering our belief that the company may struggle to maintain the current elevated margins. Moreover, the volume pickup in the oral care products will also be slower than the other categories and this is attributed to limited opportunities for penetration and lower frequency of product usage in the oral care segment.

* The recent rally captures the near-term triggers and valuation at 50.5x and 46.6x of P/E on FY25/FY26 does not offer room for valuation play. We maintain our NEUTRAL rating on the stock.

In-line sales; all-time high gross margin

* Colgate (CLGT) sales grew 8.1% YoY to INR13.9b (est. INR13.7b).

* Domestic revenue was up 8.8% YoY; volume was flat to negative (est +2%).

* While some FMCG companies have initiated price cuts to pass on RM benefits (home care, skin cleansing, etc.), Colgate is retaining the benefits and implemented price increases for some products (at premium end).

* However, the pricing strategy is similar within the oral care peers. Thereby, compared to other FMCG companies (seeing price cuts), Colgate’s revenue performance stands on the higher side.

* Gross margins increased 630bp YoY and 340bp QoQ to 72.2% (est. 68.4%), reaching an all-time high margin.

* Employee, A&P and other expenses were up 11%, 20%, and 2% YoY.

* As percentage of sales, other expenses stood at 16.1% (down 90bp YoY), advertising expenses at 14.6% (up 150bp YoY), and staff cost at 7.9% (up 20bp YoY).

* EBITDA margin expanded ~550bp YoY to 33.6%.

* EBITDA grew 29.6% YoY to INR4.7b (est. INR4.2b).

* PBT grew 35.6% YoY to INR4.4b (est. INR3.9b).

* Adj. PAT grew 35.7% YoY to INR3.3b (est. INR2.9b).

* In 9MFY24 Net sales/EBITDA/adj. PAT growth stood at 8.3%/25.0%/29.1% YoY.

Other takeaways

* Overall volume growth declined marginally; the toothpaste segment saw flat to marginal positive volume growth.

* The price hike was implemented at the end of 2QFY24; full benefits were visible in 3QFY24.

* Toothpaste clocked double-digit revenue growth, whereas toothbrush sales experienced a decline.

* The toothbrush mix was unfavorable, registering a decline in volume growth.

* Volume trajectory is gradually seeing progression, but there is still a degree of caution regarding the recovery in rural markets.

* In categories such as oral care, changes in price and volume are relatively less sensitive compared to home care. Therefore, implementing price cuts may not significantly contribute to the recovery of volumes.

* Natural segment (industry-wide) has witnessed a similar trend with no divergence between natural products and others.

* Gross margin achieved in 9MFY24 (68-69%) are more sustainable than those achieved in 3QFY24 (72%).

* The company remained focused on volume recovery instead of further expanding its operating margin.

Valuation and view

* With a beat on EBITDA margin, we raise our FY24 and FY25 estimates by 5-3% EPS.

* The sales/EBITDA/PAT CAGR for the 10-year period ending FY23 stood at 5%/9%/8%. Despite this, the overall growth seems stagnant, anticipated muted volume growth in the future. Additionally, due to high oral care penetration and competition from herbal players, CLGT has struggled to achieve volume growth for several years. Moreover, premiumization in general trade and traction in personal care have been slow.

* FY25 will be a testing period to check margin trajectory. It seems both gross margin and EBITDA margin have elevated to unsustainable levels. The ongoing debate between prioritizing growth vs. maintaining margins will persist, and to accelerating the growth, margins mat at risk.

* Given the likelihood of continued weak topline and earnings growth in the future, it is unlikely that the stock will undergo a re-rating. We reiterate our Neutral rating on the stock with a TP of INR2,400 (target multiple of 45x Dec’25E EPS, close to a five-year average).

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