Maintain ADD on Colgate Palmolive - Toothpaste returning to growth, beat in the margin - HDFC Securities

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

Colgate's 1Q revenue was in line while there was a beat in the margin. Net revenue contracted by 4% YoY with a domestic volume decline of 7%. Toothpaste business delivered growth with a volume decline of 2%. Toothbrushes dragged the revenue with a decline of 30-35% YoY. Trade inventory has improved vs. March. The company saw an impact of lockdown at the start of the quarter, but revenue improved sequentially (June and July witnessed growth). A higher share of large packs along with favourable mix (higher share of toothpaste) supported gross margin (+28bps YoY and 148bps QoQ). Control on A&P (down by 25% YoY) and other overheads (-2% YoY), resulted in EBITDA margin expanding by 196bps YoY. EBITDA grew by 3% YoY (HSIE expected -7.5% YoY). The company continued its product innovation with the launch of Palmolive hand sanitiser and a new range of toothbrushes 'Colgate Gentle'. We expect a gradual recovery in revenue with cost control headroom (A&P is highest in the industry) will result in healthy EBITDA growth in the ensuing quarters. We increase our EPS estimates by 1/3/3% for FY21/FY22/FY23. We value Colgate at 40x P/E on Jun-22E EPS and derive a target price of Rs 1,491. Maintain ADD.

Toothbrush drags revenue: Revenue declined by 4% YoY (+4% in 1QFY20 and -7% in 4QFY20), in line with our estimates. Toothpaste saw revenue growth in the quarter while toothbrush, which is a more discretionary category, dragged revenues. Brand penetration remained strong in the quarter, and the company saw healthy growth at the end of the quarter.

Beat in margin: Gross margin expanded by 28bps YoY (-5bps in 1QFY20 and +9bps in 4QFY20). Employee expenses grew by 9% YoY while ASP/other expenses declined by 25/2% YoY. EBITDA margin expanded by 196bps YoY (+59bps in 1QFY20 and -237bps in 4QFY20) to 29.6%. EBITDA saw 3% YoY growth to Rs 3.1bn, vs an expectation of Rs 2.8bn. Lower tax rate led to an APAT growth of 17% YoY.

Shares of COLGATE-PALMOLIVE (INDIA) LTD. was last trading in BSE at Rs.1423.7 as compared to the previous close of Rs. 1432.65. The total number of shares traded during the day was 76189 in over 2427 trades.

The stock hit an intraday high of Rs. 1454.4 and intraday low of 1413.75. The net turnover during the day was Rs. 108430740.

Source : Equity Bulls

Keywords