PL Stock Report: Colgate Palmolive (CLGT IN) - Q2FY24 Result Update – Growth sustainability key to further re-rating - HOLD

Colgate Palmolive (CLGT IN) - Amnish Aggarwal - Head of Research, Prabhudas Lilladher Pvt Ltd.

Rating: HOLD | CMP: Rs2,034 | TP: Rs1,948

Q2FY24 Result Update – Growth sustainability key to further re-rating

Quick Pointers:

♦ Domestic demand remains strong with toothpaste category showing higher single-digit growth

♦ Premium segment doing well, re-launch of Colgate strong teeth positive

CLGT’s 2Q results are in line with 3% volume growth, 18% EBIDTA growth and 22.3% PAT growth led by 500bps higher gross margins partly neutralized by 260bps higher ad-spends. Our estimates indicate that 2Q indexed volumes are up by just 6.5% over FY20-24 and current volume growth is driven by low base of 5 consecutive negative volume quarters before 1Q24.

CLGT continues to focus on 1) driving toothpaste category penetration and usage 2) premiumisation through science-based innovations with Total and Colgate strong teeth and 3) build personal care portfolio in body/hand wash. While CLGT is launching premium products (Total Sensitive Toothpaste, CLGT water flosser, Visible white O2 TP & Whitening Pen and Colgate Periogard Toothpaste), their contribution will remain limited in medium term.

While resilient urban demand, low base and benign inputs will enable strong growth in FY24, sustaining double digit PAT growth beyond FY24 looks challenging but for significant pick up in rural demand. We estimate 8.0% sales and 11% PAT CAGR over FY23-26. We value CLGT at 38x Sep’25 EPS and assign a target of Rs1948 (Rs1869 earlier). Re-rating potential seems capped post recent run up in stock price. Retain Hold.

Sales grew 6%, EBITDA Margins expand by 337bps YoY: Revenues grew by 6% YoY to Rs14.7bn (PLe: Rs12.5bn). Gross margins expanded by 502bps YoY to 68.8% (Ple: 66.3%) EBITDA grew by 18.2% YoY to Rs4.8bn (PLe:Rs3.5bn); Margins expanded by 337bps YoY to 32.8% (PLe:28.2%) A&P spends expanded by 260bps YoY to 13.7% Adj. PAT grew by 22.3% YoY to Rs3.4bn (PLe:Rs2.4bn).

Key Highlights:

♦ 3% volume growth with balance accounted for by pricing and mix change.

♦ Focus on Colgate strong teeth relaunch with expanding reach and availability.

♦ Domestic growth remains strong with toothpaste segment witnessing higher single-digit growth, overall growth at 6.6%.

♦ Premium segments continue to do well with both Total and Colgate max fresh growing ahead of the market.

♦ Restaged its largest toothbrush franchise Colgate Zig Zag with superior mix focusing on deep and interdental cleaning

♦ CLGT witnessing upgradation with focus on premium category.

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