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Solid Q1; valuation demands sustained healthy earnings

Colgate India has turned around its fortune under the new leadership, where actions in the core oral care portfolio have been rewarding. Regarding the two key concerns of low-volume growth and business diversification, the company has addressed the first concern with high single-digit toothpaste volume growth in Q1FY25. The improved show led us to upgrade earnings by 2-3% over FY25-27E and target valuations multiple to 45x from 41x (now a 10% premium to its historical avg. fwd. P/E). In the absence of much action on diversification, we now see high single-digit sales growth over FY25-27E. We lift the margin for FY25E by 100bps but see moderate improvement over FY26-27E, thereby limiting support to earnings. Given the limited earnings visibility, we maintain REDUCE with Jun-25E TP of Rs2,850/share (vs Rs2,525/share earlier).

Strong topline delivery; high single-digit volume growth is a positive

Colgate India reported strong 13% topline growth in Q1 (a 3% beat), aided by doubledigit value and high single-digit volume growth in toothpaste. The management noted that steady demand pickup in rural reflects in better-than-urban market growth (trend similar to Q4FY24). Based on peer performance for the quarter (HUL reported mid-single digit growth), we sense market share gains for the company. Double-digit growth in the toothbrush portfolio is heartening. We see that an improved growth trajectory would be positive for the company from a growth perspective, where reliance on price growth is likely to be limited. We see 10% sales CAGR over FY24-27E. The company continues to focus on its differentiated approach in the category advocating for teeth whitening and to drive category consumption with twice brushing habit and its Brush at Night campaign.

Margin delivery continues to surprise

Colgate sustained healthy expansion in EBITDA margin by 240bps YoY to 34%. Gross margin rose by 220bps YoY to 70.6%, aided by price hikes in part of the portfolio. A&P spending increased 10% YoY, but eased by 40bps YoY as a % of sales to 13.3%. EBITDA and earnings growth were 22% and 26% (7-8% beat), respectively. Considering Q1, we lift FY25E margin by 100bps to 34.5% and expect limited margin expansion (given thrust on business diversification). From FY26E, we see earnings replicating topline growth.

Performance improvement positive, sustenance key for valuations; REDUCE

Colgate, under the new management, has been able to evolve its strategy in the slowgrowing oral care category, which is now improving on the back of Colgate’s category development efforts. In the last couple of years, Colgate has maximized margin and enhanced structural prospects. The stock valuation at 52x P/E for FY26E and forward P/E near 3x S. D. (at 57x), demand sustenance of healthy earnings momentum, which looks tough on a high base. We maintain REDUCE with Jun-25E TP of Rs2,850/sh (on 45x P/E).

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