Maintain ADD on Colgate Palmolive - Muted Q4, signs of improving execution - HDFC Securities

Mr. Varun Lohchab, Head Institutional Research & Mr. Naveen Trivedi, Institutional Research Analyst, HDFC Securities.

Colgate Palmolive (Q4FY20): Muted Q4, signs of improving execution. Maintain ADD
(TP Rs 1,328, CMP Rs 1,313, MCap Rs 357bn)

Colgate saw a 7% yoy dip in its revenues as lockdown impacted primary sales. However, co witnessed positive momentum pre-Covid with market share gain for toothpaste. Most personal care companies / categories struggled in 4Q (HUL BPC down by 14% yoy, Marico PCNO/VAHO down by 12/18% yoy, GCPL India business down 18% yoy and Gillette down 13% yoy). We believe oral care being an essential category will recover quickly and revenue loss due to channel disruption will be minimal (unlike many FMCG categories). Co's new launches are exciting and expect similar aggression in the coming years. Focus on MT/Ecomm channel will continue to drive its premium portfolio and market share gain (160/200bps yoy market share gain in MT/Ecomm channel in 4Q). Co expects to expand its gross margin and is investing behind its brands. We cut EPS estimates for FY21/FY22 by 3% to factor in subdued category growth and moderation in premiumisation trend. We value COLGATE at 38x on Mar-22E EPS, deriving a TP of Rs 1,328. Maintain ADD.

Revenue decline of 7%: Revenue declined by 7% yoy (+6% in 4QFY19 and +4% in 3QFY20) vs our estimate of flat revenue. Volume declined by 8% (+5% in 4QFY19 and +2% in 3QFY20). Given loss of sales in last 10 days of March, we believe volume growth was 2.5-3% pre-Covid (similar to 3Q trend). New launches like Charcoal clean and PC products like essential oil shampoos, body washes, etc under Palmolive saw strong traction. Launches like Naturals toothrushes and new marketing campaign for Vedshakti aided revenue growth pre-Covid. Co has also launched hand sanitizers in April.

EBITDA margin dip by 234bps yoy: GM was up by 9bps yoy (-57bps in 4QFY19 and +99bps in 3QFY20) to 64.7% (lower than estimates). Employee expenses were up by 22% while ASP/other expenses saw a decline of 1/10%. ASP acceleration was missing in FY19 (up 7% yoy) but grew by 15/9% yoy in 9MFY20/FY20. This reflects that management has stepped up aggression wrt investment behind its brands. EBITDA margin was down by 237bps to 24.5% (-127bps in 4QFY19 and -105bps in 3QFY20). EBITDA declined by 15% (+1% in 4QFY19, flat in 3QFY20). Higher other income (+64% yoy) and lower taxes led to a 3% growth in PAT to Rs 2.04bn (est Rs 1.99bn).

Call & other takeaways: (1) Co has increased its focus on Ecomm by constituting a dedicated team to drive growth, (2) Market share gains across its portfolio in 4QFY20, in March co gained 80bps yoy market share, (3) Toothpaste category growth in 2019 was at 4% yoy with flat volume. In 4QFY20, growth was 2% yoy with 3% volume dip, (4) Cash & equivalents are at Rs 4.8bn which is an improvement over Rs 4.2bn in FY19, (5) Co has repaid its debt which was Rs 777mn in FY19.

Shares of COLGATE-PALMOLIVE (INDIA) LTD. was last trading in BSE at Rs.1313.55 as compared to the previous close of Rs. 1333.9. The total number of shares traded during the day was 35361 in over 2829 trades.

The stock hit an intraday high of Rs. 1343.8 and intraday low of 1309. The net turnover during the day was Rs. 46920375.

Source : Equity Bulls

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