IGI Logo

Volume print improves; margin and valuations peak

*  Colgate (CLGT) delivered a 13% YoY revenue growth to INR15b (est. INR14.4b) in 1QFY25. Volume growth spiked at a high-single digit (flattish in the previous four quarters). The rural market continued to display positive signs of demand recovery, and it is growing ahead of urban. HUVR reported mid-single digit revenue growth in oral care in 1QFY25.

*  Gross margin continued to expand, up 220bp YoY to 70.6%, aided by moderating RM prices, cost savings, and price-led growth. In line with the industry trend, A&P spending was high at 10% YoY. Despite this, EBITDA margin expanded 240bp YoY to 34%. EBITDA jumped 22% YoY to INR5.1b.

*  Product innovations and marketing efforts have enabled CLGT to achieve volume growth in 1QFY25. While price hikes have contributed to overall growth in FY24, the positive volume trend indicates a promising outlook. It will be important to monitor if this momentum sustains throughout 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 expand its operating margin level. The current valuations at 56x/52x P/E on FY25E/ FY26E capture most of the near-term triggers. We reiterate our Neutral rating on the stock with a TP of INR3,150 (based on 50x Jun’26E EPS)

Volume-led beat; positive trends for rural demand

*  Volume grew in high-single digit: CLGT’s sales grew 13% YoY to INR15.0b (est. INR14.4b); the last four-quarters clocked 9% YoY average growth. Rural markets continued to exhibit positive signs of demand pickup, growing ahead of urban. Toothpaste delivered a high-single digit volume growth (est. 2.5%), the last four-quarters clocked around flat YoY volume growth. The toothbrush portfolio witnessed a competitive growth trajectory, with strong double-digit revenue growth.

*  Margin at an all-time high: Gross margin improved 220bp YoY to 70.6% (est. 69.0%). As a percentage of sales, staff costs rose 30bp YoY to 7.5%, adspends dipped 40bp YoY to 13.3%, and other expenses were flat at 16.0%. EBITDA margin expanded ~240bp YoY to 34.0%.

*  Double-digit growth: EBITDA grew 22% YoY to INR5.1b (est. INR4.7b). PBT rose 26% YoY to INR4.9b (est. INR4.5b). Adj. PAT grew 26% YoY to INR3.6b (est. INR3.3b).

Valuation and view

*  We raise our EPS estimates for FY25 and FY26 by 6-7% on the back of improving volume performance, aggressive pricing strategy, and consistent operating margin expansion.

*  CLGT’s sales growth lagged staples peers from a 5-/10- year CAGR prospective. Overall growth also appears 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 margin trajectory and volume expansion. It seems both gross margin and EBITDA margin have reached peak levels. The dilemma about prioritizing growth vs. maintaining margins will persist, and to accelerate growth, margins may contract.

*  The current valuations at 56x/52x P/E on FY25E/ FY26E capture most of the near-term triggers. We reiterate our Neutral rating on the stock with a TP of INR3,150 (premised on 50x Jun’26E EPS, earlier 45x P/E).

For More Motilal Oswal Securities Ltd Disclaimer http://www.motilaloswal.com/MOSLdisclaimer/disclaimer.html

SEBI Registration number is INH000000412