Q3FY24 Review: Colgate India: A good quarter led by margin expansion

23 Jan 2024 , 02:33 PM

Colgate India delivered a top-line growth of 8%, driven by low double-digit growth and positive volume expansion in the Toothpaste segment. With over 90% penetration in this category, Colgate is looking to focus on boosting growth via premiumisation and increased frequency of usage. With price hikes to materially anniversarise by Q4FY24, there is a downside risk to sales growth, unless volumes pick up. With recovery in the rural demand sentiment, analysts of IIFL Capital Services expect the volume growth trajectory to improve. On the back of beat on margins, analysts of IIFL Capital Services upgrade their EPS estimate for FY24/25/26 by ~2%. Maintain ADD; TP Rs2,500. 

Beat on all fronts: 

Overall sales growth came in at 8% vs analysts of IIFL Capital Services estimate of 7%. Gross margin expanded by 640bps YoY (IIFLe 290bps expansion) and stands at 72% for Q3FY24 (68.6% for Q2FY24). The GM expansion was on account of moderating commodity inflation and better product mix. Ebitda margin expanded by ~560bps and came in at 33.8% (IIFLe 30.6%; margin expansion ~240bps). The beat in Ebitda margin was on account of higher-than-expected gross margin expansion. 

Expect gradual recovery in volumes: 

Strong overall performance in Q3FY24 was due to margin expansion (GM as well as Ebitda). However, analysts of IIFL Capital Services expect the current level of margins to have been maxed out. With price hikes to materially anniversarise in Q4FY24, there is a downward risk to the sales and Ebitda growth, unless volumes pickup. With moderating inflation and increase in real rural incomes, analysts of IIFL Capital Services expect the rural demand sentiment to improve and primarily drive sales growth going ahead. 

EPS upgrade for FY24/25/26 by ~2%: 

Analysts of IIFL Capital Services upgrade their EPS estimate for FY24/25/26 by ~2% to factor in the beat in margins; led by moderating inflationary pressure. Analysts of IIFL Capital Services estimate the gross margin for FY24-26 to be ~70% and the Ebitda margin to be ~33%. They reiterate ADD; TP Rs2,500.