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Unchanged volume trend; margins at all-time high

* Colgate (CLGT) delivered revenue growth of 10% YoY to INR14.9b (est. INR15.0b) in 4QFY24. Revenue growth was mainly led by pricing and mix, as we believe volume growth would be flat or in low-single digits. DABUR and HUVR registered 22% and double-digit revenue growth in 4Q in oral care, respectively.

* Gross margin continued to expand, up 240bp YoY to 69.3%, aided by RM softening, cost savings, and price-led growth. In line with the industry trend, A&P spending was high at 18% YoY. Despite this, EBITDA margin expanded 230bp YoY to 35.7% (all-time high). EBITDA grew 18% YoY to INR5.3b.

* Despite numerous product innovations and marketing efforts, CLGT has not seen a notable recovery in volume. Price hikes have supported overall growth so far, but the volume trend will be a key factor to watch out for in FY25. The personal care portfolio is under-indexed; we would like to see if CLGT can boost this portfolio. We believe it will be challenging for CLGT to sustain the current margin level.

* The current valuation at 51x/47x of P/E on FY25E/FY26E EPS captures nearterm triggers. We maintain our Neutral rating on the stock with a TP of INR2,500 (45x Mar’26E EPS).

In-line revenue; all-time high EBITDA margin

* Double-digit sales growth: Sales grew 10% YoY to INR14.9b (est. INR15.0b). Rural markets continued to exhibit positive signs of demand recovery, growing ahead of urban markets. Modern trade and e-commerce platforms reported strong performance. We model a 7% revenue CAGR over FY24- 26E.

* Margins at all-time high: Gross margins increased 240bp YoY to 69.3% (est. 70.6%). CLGT continues to invest in brand building, as ad spending increased by 18% YoY to INR1.7b. As a percentage of sales, other expenses were lower at 16% (-60bp YoY), advertising expenses were high at 11% (+70bp YoY) and staff costs stood at 7% (+10bp YoY). EBITDA margin expanded by ~230bp YoY to 35.7% (all-time high). We model EBITDA margin of 33% for FY25 and FY26 vs. 33.5% in FY24.

* High-teens EBITDA/PBT/PAT growth: EBITDA grew 18% YoY to INR5.3b (est. INR5.1b). PBT grew 19% YoY to INR5.1b (est. INR4.8b). Adj. PAT rose 20% YoY to INR3.8b (est. INR3.7b).

* In FY24, net sales/EBITDA/APAT growth stood at 9%/23%/27% YoY. In FY24, toothpaste delivered double-digit growth.

Key highlights from the management commentary

* In urban markets, ~20% of households brush twice a day, which represents an opportunity to focus on the balance 80% households to further increase the consumption.

* Dentists recommend that a toothbrush should be replaced once every three months but it is replaced average every nine months in India. This should also provide a good volume growth opportunity.

* Strong margin expansion in FY24 was attributed to cost-saving initiatives taken by the company, such as global supply synergies, packaging savings, optimized plant allocation, automation, a favorable product mix and import substitution. CLGT aims to maintain current EBITDA margins in FY25.

* “Bright Smiles, Bright Futures” reached total 176.2m kids (5.2m kids in FY24) and would reach additional 10m kids in FY25.

Valuation and view

* We do not make any material changes to our EPS estimates for FY25 and FY26.

* CLGT sales growth has lagged staples peers from a 5/10- year CAGR prospective. Overall growth also seems stagnant. Additionally, due to high oral care penetration (99%) and competition from herbal players, CLGT has struggled to outperform. Premiumization in general trade and traction in the personal care portfolio have been slow.

* FY25 will be a testing period for CLGT in terms of the margin trajectory. It seems both gross margin and EBITDA margin have reached unsustainable levels. The dilemma about prioritizing growth vs. maintaining margins will persist, and to accelerate growth, margins may contract.

* The current valuation at 51x/47x of P/E on FY25E/FY26E EPS captures near-term triggers. We maintain our Neutral rating on the stock with a TP of INR2,500 (45x FY26E EPS).

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