Colgate-Palmolive's Q2FY18 results (Underperformer) - Weak quality of earnings…share losses continue..

Q2FY18 result highlights

• Colgate’s revenue increased by 3% yoy at Rs10.8bn, EBITDA grew by 10% yoy to Rs 2.9bn, Adjusted PAT was up 5% yoy at Rs 1.76bn.
• Overall volumes declined by 0.9% yoy with toothpaste market shares declining by 170bp.
• Gross margins expanded 50bp aided by price hikes. Staff cost increased by 13% yoy, other expenses declined by 2% yoy. Advertising expenses were down 7% yoy (down 110bps as a % to sales). Resultant EBITDA was up 10% yoy with a margin expansion of 180bps to 27.2%.
• Other income was down 19% yoy, depreciation was up 18% yoy. Adjusting for tax reversals, PAT was up 5% yoy to Rs1.76bn.

Key positives: Continued expansion in gross margins

Key negatives: Continued market share loss in toothpastes segment

Impact on financials: Factoring weak performance, we have cut our FY18/19E estimated by 1%/2% respectively.

Valuation & view

Volume growth continues to be a challenge; though Colgate has reported results earlier than peers, we expect it its volume performance to be among the weakest in our coverage universe. Further, toothpaste market share loss continues unabated which remains our primary concern. Though the company has made another launch in the naturals space in Q2, we believe that reducing ad spends in an environment of high competitive intensity may be detrimental to volumes going forward. Our concerns persist on the Colgate’s lack of aggression on new launches as well as the broader competitive intensity in the toothpaste category in which the No.2 player HUL has also made another play in the form of Ayush. The stock trades at 40xFY19E and 35xFY20E earnings. We maintain our Underperformer rating on Colgate.