MOSL: COLGATE (Buy)-Mixed bag – volumes disappoint but margins expand sharply

Colgate: Mixed bag – volumes disappoint but margins expand sharply

(CLGT IN, Mkt Cap USD5.2b, CMP INR1208, TP INR1420, 18% Upside, Buy)

• Colgate’s (CLGT) volumes rose 4% YoY (est. of +6%) in 4QFY18. Net sales grew 5.2% YoY to INR10.9b (est. of INR11.4b). EBITDA was up 26.6% YoY to INR3.1b (est. of INR2.8b), while adj. PAT rose 37.9% YoY to INR2b (est. of INR1.7b). Toothpaste market share stood at 53.4% in FY18 (-170bp YoY, -30bp QoQ).
• Gross margin continued expanding to reach 65.7% (+300bp YoY; est. of 63%). Low ad spends (-80bp YoY to 13.1% of sales), other expenses (-60bp YoY to 17.4% of sales) and staff cost (-40bp YoY to 6.9% of sales) led to EBITDA margin expansion of 470bp YoY to 28.2% (est. of 24.8%).
• FY18 performance: Sales, EBITDA and adj. PAT grew 5.2%, 17.9% and 18%, respectively. Gross and EBITDA margin expanded 150bp (to 64.4%) and 290bp (to 26.6%), respectively.
• Concall highlights: 1) Company expects a pick-up in rural sales. 2) CLGT plans to hike prices in view of rising commodity costs.
• Valuation view: We are optimistic on CLGT’s earnings prospects, given (1) its impressive execution after a delay in the herbal portfolio launch – the two products launched have seen good response, and more products will be rolled out under the Vedshakti umbrella and (2) CLGT’s high rural market share of ~60% (rural contributes 40%+ of its sales), which makes it a promising play on a rural recovery. Patanjali impacted severely initially, but the threat is perceptibly reducing. Even on FY18 EPS, CLGT trades at ~10% discount to our ex-cigarette and alcohol consumer peer valuations. With return ratios superior to peers barring HUL (return ratios will only improve on better utilization of expanded capacity and with earnings growth apparently back on track), such discounts are unwarranted, in our view. Valuing CGLT at 41x FY20E EPS (in line with three-year average), we derive a TP of INR1,420. Buy.