Colgate-Palmolive's Q2FY19 results (Upgrade to Outperformer) - A turnaround quarter
Q2FY19 result highlights
- Net sales increased by 8% yoy to Rs11.6bn (est: Rs11.5bn), EBITDA (incl op income) increased by 10% yoy to Rs3.3bn (est: Rs3.3bn), Adjusted PAT increased by 9% yoy to Rs1.9bn (est: Rs1.95bn). Reported PAT was up 11% yoy to Rs1.96bn.
- Overall volumes increased by 7% yoy (est:5%)
- Gross margins improved by 130bps yoy to 64.5%. Staff cost declined by 7% yoy, other expenses increased by 14% yoy and advertising expense were up 17% yoy basis (up 90bps yoy as a % to sales to 12%). Resultant EBITDA margins increased by 50bps yoy to 28.2%.
- Depreciation increased by 1.7% yoy, other income was down 2.4% yoy, tax rate was up 50bps yoy. Adjusting for tax reversal (Rs40m) in 2QFY18, PAT increased by 9% yoy to Rs1.9bn
- Market share for Toothpaste segment came in at 52.5% for Apr-Sep 2018 period compared to 52.4% for Jan-Jun 2018 period.
Key positives: Healthy volume growth and improving market share trend in Toothpaste segment
Key negatives: Sequential decline in gross margins
Impact on financials: Our earnings estimates remain largely unchanged
Valuations & view
After close to 3 years, Colgate has delivered a quarter showing promise of market share improvement in its core toothpaste category. We believe this trend could likely accelerate given the investments being made in new launches (Colgate Swarna Vedshakti) and adding direct distribution. Given that this coincides with perceived troubles at Patanajali’s end, we believe Colgate could return to the sweet spot of margin accretive market share gain in a few quarters from now. We are factoring a 14% earnings CAGR driven by a 7% volume CAGR, consistent pricing growth and operating leverage benefits for the company over FY18-21E. From a valuation perspective, the company trades at a discount to its 5 year average PE and to India HPC players like Dabur, Marico and GCPL who operate at far lower cash conversions and return ratios. We believe the beginning of a turnaround will also bring about a re-rating in the stock; we upgrade Colgate to an Outperformer (from Underperformer) valuing it at 35xFY21E earnings.
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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