Colgate-Palmolive's Q3FY19 results (Downgrade to Neutral) - Steady earnings…valuations cap upsides

Q3FY19 result highlights

• Net sales increased by 6% yoy to Rs10.9bn (est: Rs10.9bn), EBITDA (incl op income) increased by 11% yoy to Rs3.1bn (est: Rs3.1bn), Adjusted PAT increased by 12% yoy to Rs1.8bn (est: Rs1.78bn). Reported PAT was up 13% yoy to Rs1.9bn.
• Overall volumes increased by 7% yoy (est:5%)
• Gross margins were flattish on yoy basis (up 40bps qoq) at 64.9% impacted by higher input costs.
• Staff cost declined by 5% yoy, other expenses increased by 5% yoy and advertising expense were up 4% yoy basis (down 30bps yoy as a % to sales to 11.5%). Other op income was up 22% yoy. Resultant EBITDA margins increased by 130bps yoy to 28.6%.
• Depreciation increased by 3% yoy, other income was down 12.5% yoy. Adjusting for tax reversal (Rs89.7m in 3QFY19 & Rs71m in 3QFY18, PAT increased by 12% yoy.

Key positives: Better than expected volume growth

Key negatives: Rising input costs and high promotional intensity

Impact on financials: We cut our FY20/21E earnings by 2%/3%

Valuations & view

Colgate 3QFY19 earnings were largely in line with our estimates. With volume market shares remaining stable, the healthy volume growth for the quarter was more a function of improvement in overall industry growth. We are factoring ~7% volume growth resulting in 11% sales CAGR over FY19-21E aided by distribution expansion and investments behind core brands. Given the high competitive intensity, high penetration in oral care, and Colgate’s single category salience, we believe revenue growth upsides are capped. This coupled with rising input costs will curtail overall margin expansion despite its ability to take price hikes and drive cost efficiencies, resulting in earnings CAGR of 13% over FY19-21E. Post our upgrade, the stock has seen sharp run up of ~20% and valuations at 43x/37x FY20/21E earnings (similar to mid-cap peers) provide limited upsides. Downgrade to Neutral.