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MOSL : COLGATE: Sales revival remains elusive

Colgate: Sales revival remains elusive

(CLGT IN, Mkt Cap USD5.3b, CMP INR1603, TP INR1620, 1% Upside, Neutral)

• CLGT's 2QFY23 sales were in line with our estimates. Gross margin contracted higher than expected; however, lower advertisement costs led to in-line EBITDA.
• The management highlighted that 2QFY23 saw healthy sales momentum on the back of focused positioning of festive season initiatives. It remains cautiously optimistic of improving its overall growth trends, including in rural India.
• While we await the response of re-launches/launches and the strategy under the new CEO, the core issue of lack of sales growth (caused by high category penetration, especially when CLGT has not shown any signs of regaining lost market share) will continue to delay re-rating of the stock, given the little signs of a  slight deviation from its dependence on Oral Care. We reiterate our Neutral rating on the stock.

In-line performance with our estimates

• CLGT reported net sales growth of 2.6% YoY to INR13.9b (in-line). 1HFY23 was up 2.6% YoY at INR25.8b.
• We believe that domestic volume was likely flat YoY during the quarter.
• EBITDA came flat YoY to INR4.1b (in-line). 1HFY23 EBITDA declined 3% YoY to INR7.3b.
• PBT grew 3.7% YoY to INR3.7b (in-line). 1HFY23 PBT remained flat at INR6.7b.
• PAT grew 3.3% YoY to INR2.8b (in-line). 1HFY23 Adj. PAT remained flat at INR5b.
• Gross margins contracted 300bp YoY to 63.8% (v/s est. of 66.5%)
• As a percentage of sales, lower staff costs at 6.8% (-90bp YoY), ad-spends at 11.4% (-230bp), and higher other expenses at 16.1% (+40bp YoY) led to flat EBITDA margin (-20bp YoY).
• Absolute ad spends decreased 14.6%/2.9% YoY/QoQ to INR1.6b.
• The company has declared a dividend of INR18/share.

Key highlights from the press release

• The management said that demand momentum has improved compared to previous quarters.
• Core brands, i.e., Colgate Strong Teeth, Colgate MaxFresh, and Colgate Active Salt continue to report healthy growth.
• Visible White O2 delivered very strong performance.
• Going forward, the company plans to continue investing in its core brand, along with premiumization and category expansion in personal care.