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Volume beat & disclosure, a welcome surprise

Colgate-Palmolive (India) Ltd. (CLGT) delivered robust 1QFY25 performance. Domestic revenue growth stood at a 2yr CAGR of 12.6% on the back of high singledigit volume growth in Toothpaste segment (higher than our estimate of 3%). Gross margin profile continues to improve, which led to higher operating margins versus our estimate. Pickup in rural market (outpaced urban markets for 2nd consecutive quarter), relaunch/restaging of key brands done in 2HFY24, activations through campaigns, along with premiumization should continue to support near-term growth. We have been surprised by the company on margins over the last few quarters. Assuming current margin profile stays and sees further modest improvement in FY25 & FY26, we see a 5.1%/7.4% upwards revision in our FY25E/FY26E EPS. Disclosure of volume growth improvement will be welcomed by the street, but we hope it remains part of disclosure in future as well. We roll-forward our valuation to Sep’26E EPS and assign a higher target multiple of ~48x now, which changes our target price (TP) to Rs3,300 (Rs2,700 earlier). Maintain NEUTRAL. Market share movement & update on diversification being explored in personal care will aid further rerating.

Result Highlights

* 1QFY25 headline performance: Revenue (including OOI) grew by 13.1% YoY to Rs15.0bn (vs est. Rs14.4bn). EBITDA grew by 21.6% YoY to Rs5.1bn (vs est. Rs4.7bn). Adjusted PAT (APAT) was up 26.3% YoY to Rs3.6bn (vs est. 3.4bn).

* Margins: Gross margin surprised us positively coming at 70.6% (up ~220bps YoY and 130bps QoQ; vs est. 69.5%). Advertising spends were down by 40bps YoY to 13.3% (+9.8% YoY on absolute basis) while staff cost was up 30bps YoY, which meant that EBITDA margin was up by ~240bps YoY to 34% (vs. our est. 32.7%), ahead of expectations.

Excerpts from press release

* The quarter witnessed continued demand pickup in rural markets outpacing growth in urban markets for the second quarter in a row.

* Toothbrush portfolio has also seen a concrete positive shift in competitive growth trajectory with strong double-digit growth in topline.

* Quarter saw introduction of first to the world Whitening booster gel in the rapidly growing Whitening segment.

View & Valuation

We now build 10.8% revenue CAGR over FY24-FY26E (way higher than the ~4.9% CAGR delivered over the last five years) led by (a) Better overall category growth especially from rural markets, (b) Support from relaunches, innovations, and activations, (c) Premiumization. Assuming current margin profile stays and sees further modest improvement in FY25 & FY26, we now see a strong 18.2% EBITDA CAGR over FY24- FY26E (~420bps EBITDA margin expansion largely led by gross margin improvement). We thus see a 5.1%/7.4% upwards revision in our FY25E/FY26E EPS. CLGT is currently trading at ~56x/50x on our FY25E/FY26E EPS. Improved margin profile & working capital, better cash generation, enhanced return ratios, potential inorganic opportunity in personal care space and softer aspect of volume growth disclosure merits better target multiple as we build strong 21.7% EPS CAGR over FY24-26E. Disclosure of volume growth improvement will be welcomed by the street, but we hope it remains part of disclosure in future as well. We roll-forward our valuation to Sep’26E EPS and assign a higher target multiple of ~48x now, which changes our TP to Rs3,300 (Rs2,700 earlier). Maintain NEUTRAL. Market share movement & update on diversification being explored in personal care will aid further rerating.

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