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High base and low demand to hurt near-term show

We reiterate our REDUCE call on Colgate due to a high base for growth delivery ahead. The company has executed well on oral care and consistently surprised the street with its performance. However, amid a tough demand setting now, we see price power waning which will limit margin delivery ahead and result in muted earnings. Q2 results were a miss – 10% sales growth (3% lower than our estimate) and 4% adj PAT growth (11% lower). We believe business diversification is key for double-digit growth ahead; the company could double down on personal care offerings which, though, could be margin dilutive. After Q2 results and weak management commentary, we cut FY25-27E earnings 5- 8% and lower our target valuation multiple, from 50x to 47x (now at 10% premium to the last 5YF avg P/E). Our new Sep-25E TP is Rs3,000.

Double-digit sales growth continues; toothpaste volume grows in HSD

Colgate India reported 10% sales growth (~3% miss on our estimates) with estimated ~6% volume growth (~7% volume growth in toothpaste). Toothpaste volume growth remained in a high single-digit (HSD) range, aided by the Max Fresh and Strong Teeth offerings. Its Premium portfolio sustained double-digit growth. Toothbrush saw doubledigit growth, aided by premiumization. Management cautioned on the near-term outlook. For 2H, we see a mid-single-digit volume growth and a similar price growth. Over FY26- 27E, we see growth moderating to ~9%. We continue to see business diversification as key for growth ahead, wherein the company should leverage opportunities in the home and personal care space. We reduce our topline estimates by 1-2% over FY25-27E.

EBITDA margin down by 200bps YoY; drives slower EBITDA growth, at 3%

Increased trade promotion put gross-margin pressure of 25bps YoY and 210bps QoQ on Colgate. Given the healthy prices, raw material inflation impact was muted. The company has sustained higher A&P spends at 15% of sales (up by 100bps YoY); absolute spends increased 18% YoY. Other expenses surged 16% in absolute terms, and by 75bps YoY to 15.5% in terms of sales, given increased investments in technology-backed tools. Overall EBITDA margin saw a 200bps contraction YoY to 30.7%. EBITDA and adjusted PAT grew 3% and 4%, respectively, coming in 10-11% below our expectations.

High base to limit surprises ahead; maintain REDUCE

On a high margin base, we see EBITDA margin delivery to be muted ahead, and such weakness would reflect in earnings growth too. Amid the lackluster demand, we see price-led growth to be limited which will further limit margin expansion. We cut margin estimate by 90-120bps over FY26-27E. Our earnings reduce 8% for FY25E and ~5% each for FY26E and FY27E. We cut valuation multiple, from 50x to 47x (at 10% premium to its last 5YF avg P/E, given relatively better growth, margin, and ROCE in the business); retain REDUCE with new Sep-25E TP of Rs3,000 (vs Rs3,275 earlier).

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