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Moderation in growth; miss on profitability

* Colgate (CLGT) delivered a 5% YoY revenue growth to INR14.6b (miss), with mid-single-digit intrinsic volume growth in toothpaste (est. 5%). Toothbrush experienced competitive growth. Demand has shown some softness, particularly in the urban market, while rural recovery has remained steady. Consumer promotions saw an uptick during the quarter. HUVR reported mid-single-digit revenue growth in oral care in 3QFY25.

* Gross margin contracted 230bp YoY to 69.9% (est. 71.0%) from the all-time high of 72.2% in 3QFY24, while improving 140bp QoQ. EBITDA margin contracted 250bp YoY to 31.1% (est. 32.8%). EBITDA declined 3% YoY.

* Product innovations and marketing efforts have supported CLGT's volume growth. The company did not implement any material price hikes in 3Q, and last year's price hikes have been anniversarized, removing any pricing contribution to revenue. Moving forward, it will be important to monitor the volume growth momentum.

* We model ~8% revenue growth for FY25/FY26. EBITDA margin is already at an elevated level; however, sustaining it may be challenging. The current valuations at 46x/42x P/E for FY26E/ FY27E capture most of the near-term triggers. We reiterate our Neutral rating on the stock with a TP of INR2,850 (based on 45x Dec’26E EPS).

Mid-single-digit volume growth; miss on margins

* Volumes grew in mid-single digit: CLGT’s sales grew 5% YoY to INR14.6b (est. INR14.9b), and the last four quarters clocked 10% YoY average growth. Toothpaste delivered mid-single-digit intrinsic volume growth (est. 5%), with better traction from premium products.

* Miss on margins: Gross margins contracted 230bp YoY to 69.9% (est. 71.0%). Gross profit was up only 1%. Ad spends and employee expenses were largely stable YoY, while higher other expenses (up 15% YoY) impacted EBITDA performance. EBITDA margin contracted ~250bp YoY to 31.1%.

* Decline in profitability: EBITDA declined 3% YoY to INR4.5b (est. INR4.9). PBT declined 2% YoY to INR4.3b (est. INR4.7b). APAT contracted 2% YoY to INR3.2b (est. INR3.5b).

* In 9HFY25, sales/EBITDA/PAT grew 9%/7%/9%, respectively.

Key highlights from management commentary

* The company started experiencing softness in demand from midSeptember, with significant challenges in urban markets due to high inflation.

* Rural growth is outpacing urban growth, although the pace of growth remains gradual. The volume growth is positive both in urban and rural areas, though urban growth was moderate.

* Similar trends were observed for January, with softness persisting and no material improvement in demand.

* Promotional intensity has increased, with a considerable focus on freebies in urban markets.

* The company has taken no price cuts during the quarter, as raw material costs remained stable with no significant inflationary pressures.

* Pricing actions implemented last year have now been fully cycled, eliminating their contribution to revenue growth.

* The premium portfolio continues to perform well, supported by new launches, although its contribution to overall sales remains in single digits.

* Volume growth reported by the company is grammage growth but does not include the freebies offered by the company.

* Margins contracted YoY due to a high base; however, the company expects similar margin trends to continue going forward.

Valuation and view

* We cut our EPS by 3% each for FY25/FY26 to factor in the slow growth and slight cut in margin.

* Historically, CLGT’s volume growth has been weaker than that of its peers. Hence, tracking the volume trajectory will be critical in upcoming quarters given the weak urban demand. The stock has witnessed a sharp re-rating over the last 12-15 months. Similar to the margin miss in 3Q, there is a risk associated with maintaining a high operating margin in the coming quarters.

* The current valuations at 46x/42x P/E for FY25E/ FY26E capture most of the near-term triggers. We reiterate our Neutral rating on the stock with a TP of INR2,850 (based on 45x Dec’26E EPS).

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