IGI Logo

Focusing on balanced growth

Colgate (CLGT) held an analyst meet on 27th Nov’24 to discuss its strategic growth initiatives and demand outlook. Here are the key takeaways:

*  CLGT's strategic pillars that drive volume and value growth in oral care are intact. The company continues to expand its personal care portfolio and sees significant potential in preimmunizing the toothpaste and toothbrush categories. Rapid advancements in digital initiatives have enhanced CLGT's distribution, improving the product assortment in its directly serviced outlets (1.7m outlets).

* Management highlighted that in urban areas, toothpaste volume growth has continued to decelerate (since Mar’24), while growth was stable for toothbrush. Rural growth has been picking up well for both categories, in line with the trends observed across the FMCG sector. Notably, 2QFY25 marked the first quarter when urban toothpaste volume growth trailed rural growth, and urban toothbrush volumes were on par with rural. While urban markets face persistent challenges, rural areas are showing growth momentum.

* In FY24 and 1HFY25, CLGT achieved revenue growth of 9% and 11%, outperforming FMCG peers (refer to Exhibits 1/2). Volume growth remained flat in FY24 but improved to 7% in 1HFY25. This performance reflects a strategic focus on premiumization and portfolio optimization, with growth driven more by product mix enhancements than significant price hikes. Management focuses on delivering balanced growth across volumes, pricing, and product mix. CLGT's gross profit margin recovered to 69.7% in FY24, supported by favorable raw material costs, and expanded by 100bp YoY to 69.6% in 1HFY25. Management projects stable margins in the 69-70% range. EBITDA margin remained steady YoY at 32.3% in 1HFY25, as the company continued to invest in brand-building initiatives, with advertising spends increasing by 15% YoY during the period to bolster consumer awareness. We expect CLGT to deliver a CAGR of 9%/10%/11% in sales/EBITDA/adj. PAT over FY24-27E. We reiterate our Neutral rating on the stock with a TP of INR3,250.

Consistent commitment to boosting volume growth

The company remains focused on driving balanced growth through various strategies for volume, pricing, and product mix. Despite near-universal penetration in India, significant headroom exists for consumption growth. Only 20% of urban households brush twice daily, while 55% of rural households do not brush every day. Furthermore, urban and rural households replace toothbrushes every six and 15 months, respectively, compared to the recommended three-month cycle. To address these gaps, the company is actively working to influence consumer behavior through oral health awareness programs and above-the-line (ATL) communication campaigns. However, changing consumer behavior is difficult and timeconsuming, and, thus, acceleration in volume growth of the oral care category will only be gradual.

Headroom for premiumization

The premium toothpaste segment continues to witness robust double-digit growth, reflecting the effectiveness of the company’s premiumization strategy. Despite this success, the oral care category offers significant headroom for further premiumization, as penetration remains relatively low. For instance, only 22% of toothbrushes sold in India are priced above INR40, indicating substantial untapped potential.

Management is confident that initiatives focused on product assortment, consumer awareness, and channel strategies can drive premiumization. This is evidenced by the outperformance of Colgate Total, which is growing at 3x the category rate, and Visible White, which is delivering strong double-digit growth. To encourage consumer trials while maintaining affordability, the company has adopted a calibrated premium pricing strategy, currently pricing at 0.77x of Dec’23 levels. Additionally, the company has significantly expanded the availability of premium products by ramping up distribution coverage from 30,000 stores to 300,000 stores, ensuring deeper market penetration and accessibility.

Impressive progress on digital initiatives

CLGT has been effectively leveraging AI-driven tools to deliver personalized consumer interactions on e-commerce platforms, resulting in 1.5x growth in engagement and content performance. Additionally, the company leverages AI and machine learning (ML) models to optimize product assortment across 1.7m stores, ensuring better availability of premium offerings while enhancing overall operational efficiency. The company has also refined its supply chain operations, focusing on inventory management to lower stock levels while driving higher distributor sales. Meanwhile, the quick commerce channel has become a significant growth engine, outperforming the broader business with 8x growth. This channel has proven to be growth-accretive and also helped to expand margin and gain market share.

Valuation and View

* In 1HFY25, CLGT has achieved volume expansion while maintaining its margin trajectory. However, historically, CLGT's volume growth has lagged behind that of its peers. Hence, tracking its volume performance in the upcoming quarters is important, especially given the current softness in urban demand.

* Both gross and EBITDA margins have reached their peak levels, and it will be crucial to monitor the sustainability of these margins going forward. We model ~34% EBITDA margin for FY25 and FY26.

* We expect CLGT to clock a CAGR of 9%/10%/11% in sales/EBITDA/adj. PAT over FY24-27. We reiterate our Neutral rating on the stock with a TP of INR3,250 (based on 50x Sep’26E EPS).

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

SEBI Registration number is INH000000412