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Our negative stance on Colgate is on account of the missing structural narrative. After the mid-single-digit volume growth jubilance in Q1FY24 (on a low base and buoyed by planned product relaunches), the company is likely to have seen flat volume growth for Q2FY24E (4Y CAGR of only 1%). In Q2FY24, Colgate India reported in-line EBITDA, with ~18% growth YoY, wherein the revenue miss was offset by a surprise on margin. Revenue growth at 6% missed our estimate by 3%, mainly due to likely flat volume growth (vs expectations of 3% volume growth, on -3% growth in Q2FY23). EBITDA margin expanded by 335bps YoY and 120bps QoQ to 32.8%. Earnings growth at 22% came in 3% better than our estimate, driven by higher other income. We maintain SELL on the stock with Sep-24E TP of Rs1,800/share (on 35x P/E)

Volume (flat YoY) weakness remains our key concern; topline misses by 3%

Colgate India reported 6.1% YoY revenue growth in Q2FY24, with 6.6% domestic growth. Domestic toothpaste revenue growth stood in a high single digit. Growth has been priceled, wherein the company has been effecting price hikes across the portfolio, In Q2, it saw price hikes in the premium and kids portfolios. Volume growth is expected to be flat YoY in Q2FY24 (only ~1% volume CAGR in the last four years), despite a low base of 3% volume decline. Notably in Q1FY24, the company saw a mid-single-digit growth when it relaunched Colgate Strong Teeth. In Q2FY24, the company re-launched Colgate Max Fresh toothpaste and Colgate Zig Zag toothbrushes.

Price hikes in a deflationary setting help to quickly recoup gross margin

Colgate India has been effecting price hikes across portfolios (~6% YoY), despite easing in raw material prices (absolute COGS down ~9% YoY in Q2FY24). This resulted in a 500bps YoY gross-margin expansion to 69% in Q2FY24. EBITDA margin expanded by 335bps YoY and 120bps QoQ to 32.8%, standing 90bps better than our expectations. A&P spends increased by 260bps YoY to 14% of sales, with a 30% increase in absolute spends. Overall, EBITDA grew 18% YoY, in line with our estimate. Better than expected, other income (+86% YoY) aided earnings growth at 22%, almost 3% above our estimate.

Valuation ignores structural stress

Our detailed update (link) highlights price actions across portfolios in the last decade; we see pricing as a tool for healthy earnings growth for FY24. Under the guidance of the new CEO, Company has reverted its focus to the core and heightened thrust on sciencebacked and technologically-superior products. Its strategy so far has aided in premiumizing portfolios, but lacks structural growth. We note that current valuations ignore the stress ahead, given that FY25 will have a high margin base and earnings delivery will be reliant on topline growth. Steady price actions will invite competition, which will have a bearing on market share and structural growth; we retain SELL.

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