Colgate-Palmolive's Q1FY19 results (Underperformer) - Share loss continues; lower overhead cost drives earnings beat
Q1FY19 result highlights
- Net sales increased by 7% yoy to Rs10.3bn (est: Rs10.4bn), EBITDA (incl op income) increased by 27% yoy to Rs2.8bn (est: Rs2.5bn), reported PAT was up 39% yoy to Rs1.9bn. Adjusted PAT increased by30% yoy to Rs1.67bn (est: Rs1.44bn).
- Overall volumes increased by 4% yoy (est:5%)
- Gross margins improved by 260bps yoy to 65.7%. Staff cost increased by 3% yoy, other expenses increased by 2% yoy and advertising expense was flat on yoy basis (down 90bps yoy as a % to sales to 13.9%). Resultant EBITDA margins increased by 430bps yoy to 27%.
- Depreciation increased by 5.6% yoy, other income was down 24% yoy, tax rate was down 110bps yoy. Adjusting for tax reversal (Rs78m) in 1QFY18 and exceptional gain of Rs341m (profit on sale of factory land in Aurangabad), PAT increased by 30% yoy to Rs1.67bn
Key positives: Expansion in gross & EBITDA margins
Key negatives: Continued moderation in market share.
Impact on financials: Earnings estimate remain largely unchanged. Introduce FY21 earnings estimates.
Valuation & view
Despite a weak base, Colgate’s volume growth was below expectation and below industry growth, indicative from further market share loss in the Toothpaste segment (~240bps on yoy for 1HCY18). While tight control over staff and other overheads is encouraging, advertising spends remaining flat continues to surprise negatively. With base for 2HFY19 being unfavorable in terms of volumes and gross margins and competitive intensity remaining high, earnings growth trajectory is likely to moderate in coming quarters. The stock trades at 34x/30x FY20/21E earnings, at a discount to FMCG peers, given the relatively weak earnings growth trajectory (13% EPS CAGR over FY18-21E). While the macro environment is improving, we would watch for stabilisation in market share and traction in naturals segment for a better entry point in the stock. Maintain Underperformer.
Colgate Palmolive (India) Limited is engaged in the personal care and oral care business. The Company offers various personal care products, such as soaps, cosmetics and toilet preparations. The Company's oral care category of products includes toothpastes, toothbrushes, toothpowder, whitening products and mouthwash. In the toothpaste category, the Company offers products, including Colgate Total Charcoal Deep Clean Toothpaste, Colgate Active Salt Neem Toothpaste and Colgate Sensitive Pro-Relief (CSPR) Enamel Repair Toothpaste. In the toothbrush category, the Company offers the Colgate 360 degree Toothbrush range, including 360 degree Charcoal Gold, 360 degree Whole Mouth Clean, 360 degree Visible White and 360 degree Floss-Tip, and Colgate ZigZag Black Toothbrush. In the Personal Care category, the Company offers Palmolive's Foaming Hand Wash range in approximately two variants.
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