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In-line Q4; volume growth recovery is key

Our SELL call on Colgate has been a factor of limited visibility on earnings over the medium term, given that high margin gets into the base and structural growth remain elusive. Colgate’s differentiated strategy to drive growth has aided relatively better growth and helped the company to report the sector’s best margins. Volume slowdown has been our concern, and we see growth as the key moving ahead. Q4FY24 results stood in line, with 10% topline increase and 19% adj. earnings growth. EBITDA margin at 35.7% expanded 225bps YoY, aided by 245bps expansion in gross margin (to 69.3%). We maintain our estimates and see 8% sales and 9% earnings CAGR over FY24-26. Retain SELL on expensive valuations (forward cons. P/E at 51x, near 2x S.D.), with Mar-25E TP of Rs2,350/share based on 40x P/E (in line with last 5Y avg. fwd. PE).

Price-driven topline performance sustained

Colgate India reported 10.3% revenue growth in Q4FY24, with ~10.7% growth in the domestic business. We estimate volume growth to be at ~2%, which the management refrained to disclose. Management said the thrust ahead would be on volume-driven topline growth, where it is looking to leverage the core portfolio (Strong teeth, Max Fresh, and Active Salt) with higher benefits and to drive premiumization in oral care (under Total and Visible Whitening). With most of the relaunches in place, we see price driver of growth to be limited. However, with thrust on premiumization, mix growth may remain healthy ahead. Muted volume growth is our key concern, where Management sees recovery from: a) recoup in rural demand setting, b) enhanced consumer awareness drives (to boost consumption), and c) making premium accessible. Mgmt. maintains its aspiration of diversification, where it would look to get products from the parent portfolio.

EBITDA margins at peak, focus ahead on maintaining margins

Aided by healthy gross margin expansion (245bps YoY to 69.3%), EBITDA margin saw 225bps YoY expansion to 35.7%. Management attributed margin expansion in FY24 as an opportunity aided by better mix, pricing, and cost saving initiatives. Going ahead, efficiency benefits will be redeployed for topline and the focus would be maintain current margins. We expect EBITDA margin to see moderate expansion to 34% by FY26E.

Valuations demand healthy earnings ahead, margin play to be limited; SELL

Our overall SELL rating will remain as Colgate India’s forward P/E at 51x is now near 2x S.D. Company has achieved topline growth of 8.7% for FY24, while earnings growth stood at 27%, driven by 390bps YoY EBITDA margin expansion to 33.5%. We see priceled growth to be limited ahead, which will limit margin expansion. Upside risk to our call would be: a) enhanced focus on category development, aiding conversion of non-user & driving twice brushing habit amid users, and b) scale up of adjacent businesses, with renewed focus on personal-care offerings. We maintain estimates and TP of Rs2,350/share, based on 40x P/E, in line with its last five-years’ average forward P/E.

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