Colgate share price: CLSA, Nomura to Jefferies, Here are the top brokerages views post-results

Colgate share price: Colgate-Palmolive India (Colpal) delivered better than expected performance in Q2 FY21 with revenues growing by 5.2%; Operating margins expanded by 541 bps to 31.8% and adjusted PAT growing by 33% (excluding one-time tax gain on corresponding quarter last year). Toothpastes (contributing 85% to total revenue) registered a volume growth of low single digits while the toothbrush category grew by mid single digits (as compared to decline of 35% YoY in Q1).

While discretionary categories saw a recovery in sales, toothbrushes gained good traction in the domestic market. New launches in the Naturals space as well as under the Palmolive brand, including hand washes and hand sanitisers saw strong demand in the domestic market. The Naturals category is growing at a high single digit and the Vedshakti brand is growing faster than the overall category. The company’s internal estimates suggest that it has gained market share during the pandemic era as supply disruptions affected the sales of brands like Patanjali during the lockdown phase.

Improving dental habits (both in the urban market and rural India), strong traction in Naturals category and sensitive toothpaste and other new launches will be some of the key revenue drivers in the near term. With gross margins expected to remain high, we expect operating margins to remain high in the coming quarters (also supported by efficiencies). The company paid an interim dividend of Rs. 18 per share.

CLSA upgrades Colgate to Outperform from Underperform rating; Target raised to Rs 1,525 From Rs 1,420. Colgate earnings were clearly due to beat on better margins, natural segment momentum accelerated, to ease competitive pressure. Colgate reported better than expected Q2 operational numbers. Toothpaste volume grew 3% with stable market share. CLSA expects margin benefit to remain over the medium term. CLSA raise their earnings expectations by 3-4% over FY21-22

Nomura maintains buy rating on Colgate, Target raised to Rs 1,730. Nomura says revenue growth was In-line with estimates; domestic growth was higher as exports declined. The margins were up 540 bps, led by higher GM, lower Ad Spend & Other Costs. Nomura expects more feature-product launches aiding market share gains. Nomura raised FY21/22 EPS estimates By 7%/2% & expected 12.5% EPS CAGR over FY20-23.

Credit Suisse maintains outperform rating on Colgate, target raised to Rs 1650. CS says the company saw steady growth recovery & strong margin expansion. CS expects Colgate to deliver steady revenue growth as it regains market share. CS expects strong earnings growth in H2 FY21 as gross margin expansion may continue.

Jefferies maintains buy rating on Colgate, Target at Rs 1,700. Jefferies says Colgate margins climbed to all-time highs. Ad Spends declined YoY but, adjusted for lower rates, could be near flat. Jefferies raise EPS estimates by 7-9%.

Sharekhan recommends Buy on Colgate with a price target of Rs 1735. They have increased their earnings estimates by 6-7% for FY2021E/22E/23E to factor in better than expected Q2 FY21 performance along with strong expansion in Operating. In the current pandemic environment, consumers’ dental habits are getting better, which will help improve the per capita consumption in the long run along with strong traction to new launches. The stock is currently trading at 40.6x/37x its FY2022E/23E EPS. In view of its portfolio of strong brands, good cash flows and consistent dividend payout, Sharekhan recommends a Buy on the stock with a price target of Rs. 1,735.

Key positives:

1) The toothpaste category registered low single-digit volume growth versus a decline of 2% in Q1FY2021.
2) The toothbrush category saw stark improvement in performance with volume growth of mid-single digits versus a 35% decline in Q1 FY21. 
3) Operating margins expanded by 541 bps to 31.8% driven by higher gross margins.

Summary:

1) Q2 FY21 revenue grew by 5.2% (after a decline of 4% in Q1 FY 21), with toothpaste & toothbrush category volumes growing by mid-to-high single digit.
2) Gross margins improved by 339 bps to 68.1%. This, along with lower advertisement spends drove up OPM by 541 bps to 31.8%.
3) Both the toothpaste and toothbrush categories have recovered. The Naturals category is performing well with high single-digit growth.

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Key Risks:

Any incremental competition from key players in the core toothpaste category would continue to put pressure on market share in the near to medium term.

(Authored by Rahul Kamdar)