Colgate-Palmolive's Q3FY18 results (Underperformer) - Market share weakness continues

Q3FY18 result highlights

• Colgate’s revenue increased by 19% yoy at Rs10.3bn, EBITDA grew by 35% yoy to Rs 2.8bn (est: Rs2.5bn), Adjusted PAT was up 30% yoy at Rs 1.6bn(est: Rs1.5bn).
• Overall volumes increased by 12% yoy, albeit on a low base (12% volume decline in 3QFY17).
• Gross margins expanded 150bp aided by improved price/mix. Staff cost increased by 15% yoy, other expenses were flat. Advertising expenses were up 44% yoy (up 210bps as a % to sales). Resultant EBITDA was up 35% yoy with a margin expansion of 330bps to 26.9%.
• Other income was down 17% yoy, depreciation was up 16% yoy, effective tax rate was up 100bps yoy. Adjusting for tax reversals (Rs71m), PAT was up 30% yoy to Rs1.6bn.

Key positives: Expansion in gross margins

Key negatives: Higher advertising spends

Impact on financials: Factoring higher gross margins we have increased our FY18/19/20E estimates by 2%/1%/1%.

Valuation & view

The improvement in gross and EBITDA margins is a positive for the quarter. However, our concern with Colgate remains on the volume growth and market share front. The company continues to underperform peers (Dabur reported 26% growth in toothpaste) and thereby lose market shares. On the volume growth front also, the company’s volumes have declined 1% on a two year CAGR basis for Q3. We maintain our view that unless Colgate looks to invest more into innovations in the naturals space, which we believe is now over 25% of the market, challenges with respect to an inferior volume growth profile and losing market shares will continue. Maintain Underperformer.