Colgate-Palmolive's Q3FY20 results (Neutral) - Concentrated presence in poor growth category hurting…
Q3FY20 result highlights
- Net sales grew by 4.1% yoy to Rs11.4bn (est: Rs11.35bn), EBITDA (including other operating income) grew by 1% yoy to Rs3.16bn (est: Rs3.09bn), PBT fell by 5% yoy to Rs2.67bn (est: 2.65bn) while reported PAT grew by 4% yoy to Rs1.99bn. Adj for tax reversal, PAT grew by 9% yoy.
- Domestic sales increased by 4.3% yoy with a volume growth of 2.3% yoy (est: 4%).
- Gross margins were up 60bps yoy at 65.7%, better than our expectations on account of benign input cost.
- Staff cost increased by 8% yoy. Other expenses were up 6% yoy. Advertising expense were up 13.8% yoy (up 110bp yoy to 12.6% as % of Sales) as company ramped up investment behind core as well as supporting new launches. Resultant EBITDA margins fell by 100bps yoy to 27.6%.
- Other income was down 27% yoy, depreciation was up 27% yoy.
Key positives: Gross margin expansion.
Key negatives: Weak volume growth despite higher ad spends.
Impact on financials: Cut PAT estimates by 5%/7% for FY20/21E. Introduce FY22E estimates.
Valuations & view
Colgate reported a disappointing quarter, with volume growth decelerating to 2.3% (from 4% in 1HFY20). Further, its domestic revenue growth is sharply lower compared to peers like Dabur (oral care grew by 8.2% yoy in Q3FY20), which is indicative of no major improvement in market shares, despite sharp increase in advertising spend (up ~15% yoy in 9MFY20). We believe recovery in volume trajectory & market share will remain challenging for Colgate considering continued deceleration in category growth (decline of ~3.7%), a relatively weaker Naturals portfolio, higher rural salience and formidable competitive intensity. We are factoring in 6% volume CAGR over FY20-22E resulting in 8%/9.5% revenue/PAT CAGR, over the same period. Given the relatively lower visibility in terms of volume recovery, we believe, valuations at 42.5x/39x FY21/22E earnings capture most of the positives. Maintain Neutral rating on the stock.
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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