Retain ‘buy’ on Colgate with price target of Rs 1,700

Colgate’s GM & Ebitda margins climbed to all-time highs, contributing most to the 2QFY21 earnings beat. Ad spends declined YoY but, adjusted for lower rates, could be near-flat, in our view. Domestic revenue grew 7% YoY which was also positive. We are, however, surprised with the disclosure levels as Colgate stopped reporting underlying volume growth after discontinuing market share trend a few quarters back. We raise EPS by 7-9% and retain ‘BUY’.

Revenue slightly better, colgate’s 2Q revenue grew 5% YoY, better than our estimate of 3% growth and an improvement from -4% in 1Q. Domestic value growth was even better at 7%, even as exports saw a decline. Toothpaste growth accelerated from 1Q level, even as other categories also reverted to a growth trajectory (1Q had seen a sharp decline in toothbrushes). Volumes up 2-3%, in our view, toothpaste growth was aided by higher realisations due to price hike in Feb/March and better mix (higher pack size). Volume growth hence should be around 2-3%, in our estimate. We are perplexed that Colgate has been reducing its disclosures with no details on volume growth this quarter and no reporting of market share trends a few quarters back. Best-ever GM, Gross margin surprised positively for the second consecutive quarter, expanding a further 200bps QoQ and was up >340bps YoY to 68%. This should put Colgate among the most profitable companies within the Indian FMCG space. This sharp expansion was led by higher toothpaste salience, a lower share of exports, Feb/Mar price hike and increased contribution from larger pack sizes. GP growth was in double-digits at 11%.

Advt. recovering but down, colgate’s ad-spend recovered 44% QoQ and stood at c.13% of sales. On a YoY basis, however, they remained lower by 6% or 160bps YoY. This is despite aggression on launches & brand investments including in expensive sporting events like Cricket IPL. With a slew of launches, including the Gentle series of toothbrushes and a new mouthwash, we build-in a further rise in ad-spend ahead. Increase EPS by 7-9%, ee continue to like the CEO’s growth agenda and expect share gains although margin expansion makes the story even more compelling. We increase our FY21-23 EPS estimates by 7-9% and retain BUY with a PT of Rs 1,700.