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Healthy 4Q; Margins make new peak

Colgate-Palmolive (India) Ltd. (CLGT) delivered strong operating performance in 4QFY24. Domestic growth stood at 10.7% on the back of robust performance in Toothpaste segment taking the full year growth to 9.5%. The company surprised us positively yet again by delivering highest ever EBITDA margin (EM) in 4QFY24, supported by cost saving initiatives even while it continued to make investments. Recent relaunch/restaging of key brands and activations through campaigns, along with premiumization should continue to support near-term growth with now a muchneeded support from rural market recovery. At peak levels, there is limited upside on margin improvement, but we have been surprised earlier as well in FY24. Roll-forward of valuation to March’26E EPS and higher target multiple of ~46x now have led to a revised target price (TP) of Rs2,700. This along with recent price correction leads to change in our RECO a notch to NEUTRAL from REDUCE earlier. Disclosure on volume growth improvement, market share gains in core & update on diversification being explored in personal care will aid further rerating.

Result Highlights

* 4QFY24 headline performance: Revenue (including OOI) grew by 10.3% YoY to Rs14.9bn (vs est. Rs14.6bn). EBITDA grew by 17.8% YoY to Rs5.3bn (vs est. Rs4.9bn). Adjusted PAT (APAT) was up 19.6% YoY to Rs3.8bn (vs est. 3.5bn).

* Margins: Gross margin came at 69.3% (up ~240bps YoY but down 290bps QoQ; vs est. 72%). Advertising spends were up just 80bps YoY to 11.3% (+18.2% YoY on absolute basis) and staff cost was up 10bps YoY. This was partially offset by lower other expenses (-60bps YoY), which meant that EBITDA margin was up by ~230bps YoY to 35.7% (vs. our est. 34.1%), ahead of expectations.

* FY24: Revenue, EBITDA and APAT grew 8.7%, 22.9% and 26.8% YoY, respectively. Gross/EBITDA margin up 400bps/390bps YoY to 69.7%/33.5% with ad spends up 130bps YoY to 13.4% (+19.9% YoY on absolute basis).

Key highlights from earnings conference call

* FY25 Outlook: Rural is outpacing urban growth by 200bps and CLGT believes rural market recovery is sustainable. CLGT does not anticipate similar pricing growth in FY25 as last year. The management is confident of continuing strong growth in its premium portfolio. It expects the margins to remain at around current levels.

View & Valuation

We are currently building 8.3% revenue CAGR over FY24-FY26E (higher than the ~4.9% CAGR delivered over the last five years) led by (a) Expectation of the better overall category growth especially from rural markets, (b) Support from relaunches, innovations and activations, (c) Premiumization. Post the 2nd consecutive quarter of margin beat, now there is ~3%/4% upward revision in our FY25E/FY26E EPS as we now estimate 9.5% EBITDA CAGR over FY24-FY26E (~70bps EBITDA margin expansion as we expect gross margin to expand by 110bps over FY24-FY26E). The flow through to EBITDA margin will be partial due to continued media spends to support the core as well as innovations. CLGT is currently trading at ~49x/45x on our FY25E/FY26E EPS. Improved margin profile & working capital, better cash generation, enhanced return ratios and potential inorganic opportunity in personal care space merits better target multiple even while we build just 10.3% EPS CAGR over FY24-26E. Roll-forward of valuation to March’26E EPS, earnings upgrade and higher target multiple of ~46x now have led to a revised TP of Rs2,700 (Rs2,350 earlier). This along with recent price correction leads to change in our RECO a notch to NEUTRAL from REDUCE earlier. Disclosure on volume growth improvement, market share gains in core & update on diversification being explored in personal care will aid further rerating.

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