Maintain ADD on Colgate Palmolive - Healthy domestic recovery; robust margin show - HDFC Securities

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

Colgate reported a healthy 2QFY21 with 5% net revenue growth (HSIE 4.5%) and 7% domestic growth. Volume and price have equally contributed to the revenue growth. Toothpaste recovery was healthy (no sequential divergences) while toothbrush exit recovery was encouraging. Dental cream and Max fresh posted encouraging recovery. Naturals toothpaste continue to outperform (even as an industry) although the growth gap has gone down. Market share was stable during the quarter. GM expanded sharply (339bps YoY) owing to (1) price hike, (2) soft raw material and (3) favourable mix (lower revenue share of toothbrush and exports and higher share of larger pack size). We expect gradual growth recovery with healthy margin expansion in 2HFY21 and increase our estimates for FY21/22 by 6/1%. We value Colgate at 40x P/E on Sep-22E EPS and derive a target price of Rs 1,529. Maintain ADD.

Domestic revenue up 7%: Revenue grew by 5% YoY (+5% in 2QFY20 and -4% in 1QFY21), in line with our expectation. Improved penetration for most categories, along with several innovative launches by the company, led growth. Exports remained weak during the quarter, with a gradual recovery. Recovery in personal care was strong, and Toothbrush growth at exit indicated a quick revival in 2HFY21. Colgate is not expecting incremental downtrading, as mass and mid segments are growing well.

Robust >500bps EBITDA margin expansion: GM saw a sharp expansion of 339bps YoY (-2bps in 2QFY20 and +28bps in 1QFY21) vs. the expectation of +26bps YoY expansion. Employee expenses grew by 18% YoY while cost control initiatives led to ASP/Other expenses declining by 7/2% YoY. EBITDA margin was robust and saw an expansion of 540bps YoY to 31.8% (-178bps in 2QFY20 and +196bps in 1QFY21). EBITDA grew by 27% YoY (HSIE 12%). We expect margin expansion to continue in the near term, considering price hike and benign RM prices. PBT clocked 32% YoY growth while PAT grew by 12% YoY due to lower tax rate in the base quarter.

Shares of COLGATE-PALMOLIVE (INDIA) LTD. was last trading in BSE at Rs.1425.35 as compared to the previous close of Rs. 1462.75. The total number of shares traded during the day was 68460 in over 5243 trades.

The stock hit an intraday high of Rs. 1479.3 and intraday low of 1407. The net turnover during the day was Rs. 98742348.

Source : Equity Bulls

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