Maintain ADD on Colgate Palmolive - Beat on all fronts; focus on new launches' success - HDFC Securities

Mr. Varun Lohchab, Institutional Research Analyst, HDFC Securities

Colgate's 4QFY21 revenue and EBITDA was ahead of our as well as street's expectation. Net revenue grew by 20% YoY (HSIE 16%) and maintained two- year CAGR at ~5.5%. Volume growth was ~16% (HSIE 12%). Personal care growth remained robust, led by new launches and accelerating demand. The company saw strong performance across channels, especially in MT and e- comm. Toothpaste market share was maintained despite rising competition. Gross margin expansion remained strong (price hike, premiumisation and lower mix of toothbrush), increasing by 300bps YoY to ~68%. A&P declined by 4% (despite saving in 1HFY21), leading to sharp EBITDA margin expansion of +800bps YoY to 33% (HSIE 400bps expansion). Colgate's margin expansion is contrary to other consumer companies, which are witnessing margin decline. Entry into new categories and expansion of existing brands will continue to drive growth for Colgate. Revenue contributions from new launches would increase in the coming years (as of now 2-3%) as most of them are scalable and not seeing cannibalisation. We maintain EPS estimates for FY22/FY23. We value Colgate at 42x P/E on Mar-23E EPS and derive a target price of INR 1,772. Maintain ADD.

- Steady revenue growth, innovation to drive FY22: Revenue grew by 20% YoY (-7% in 4QFY20 and +8% in 3QFY21). Volume growth was at ~16% (-8% in 4QFY20, +5% in 3QFY21). Aggression in new launches continued throughout FY21 i.e., Colgate Toothpaste for Diabetics, Colgate Vedshakti Spray, Oil Pulling and Colgate Magik - a first of its kind augmented reality toothbrush for kids. The company also launched and relaunched several other toothpastes and toothbrushes during this period.

- All-time high EBITDA margin at 33%: GM expansion sustained, up by 300bps YoY to 67.7% (+9bps in 4QFY20 and +403bps in 3QFY21), HSIE 67.6%. Employee expenses grew by 2% (22% 4QFY20), while A&P was down by 4% YoY despite weak base and sharp control in 1HFY21. Other expenses were up by 12% YoY. EBITDA margin expanded by 833bps YoY to 32.9% (- 236bps in 4QFY20 and +250bps in 3QFY21), ahead of our expectation of 388bps YoY expansion. EBITDA grew by 60% YoY (HSIE 35%).

- Call and BS/CF Takeaways: (1) Rural growth sustained while rural saw improvement; (2) Naturals/Ayurvedic toothpaste contributed 38-39% for the industry while family segment was at ~33%; (3) gross margin expansion was led by product mix (lower toothbrush mix), premiumisation and price hike; (4) MT and Ecommerce supported premium products; (5) chemist channel is still under-indexed; (6) Vedshakti spray seeing 30% repeat customers; (7) diabetic toothpaste seeing 20% repeat customers; (8) Colgate's e-commerce share gain was at 1,400bps during FY19-21; (9) the company gained 170bps share gain in MT in FY21; (10) FCF was at INR 7.3bn vs. INR 8.7bn in FY20.

Shares of COLGATE-PALMOLIVE (INDIA) LTD. was last trading in BSE at Rs.1579 as compared to the previous close of Rs. 1596. The total number of shares traded during the day was 40647 in over 2969 trades.

The stock hit an intraday high of Rs. 1624.3 and intraday low of 1566.15. The net turnover during the day was Rs. 64261500.

Source : Equity Bulls

Keywords