Colgate India Q3 FY21 delivered impressive 10.1% domestic sales growth in Q3, implying mid-to-high single-digit volume growth, a further improvement sequentially. Reported net sales rose 7.8% yoy (due to weaker export sales) and were in line with consensus. Gross margin of Colgate expanded sharply by 417 bp yoy to 69.6%. Colgate significantly stepped up investment in A&P spend, by 38% yoy, yet managed to deliver a 245 bp EBITDA margin expansion. As a result, Colgate India EBITDA/PAT grew by 17.3%/24.7% yoy, respectively, both beating consensus expectations. Colgate expanded its naturals portfolio by introducing new categories such as mouth spray and oil pulling, and also launched a unique toothpaste for Diabetics in Q3.

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Why one should stay positive about Colgate:

1) Colgate Growth reset:

Colgate should see a growth reset post the crisis and a return to double-digit domestic sales growth, after a period of sustained headwinds (rural slowdown, higher competitive intensity). Volume growth acceleration is a key catalyst for the stock performance.

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2) Colgate Oral care category now appears to be in equilibrium:

Colgate’s market share decline appears to have been arrested and its own natural brand ‘Vedshakti’ is now doing quite well. A slew of innovative product launches, in HSBC’s view, will further boost growth and assert Colgate’s positioning as an oral care specialist, allowing it reasonable pricing power.

3) Colgate Strong rural demand:

HSBC believes Colgate is significantly geared to rural demand, which is likely to outpace urban demand in the near term and will continue to support growth.

4) Colgate Superior economics:

Despite the challenges of the past, Colgate is the dominant force in the oral care segment with large scale and superior economics. As volume and revenue growth recovers, it should trigger significant earnings growth led by operating leverage.

5) Colgate Laggard with appealing valuation:

Colgate has been a significant laggard in the consumer space in the past three years; its valuations are fairly undemanding and sustained earnings momentum will be a key catalyst for the stock.

6) Colgate Risk-on rally to recede:

HSBC also think that as the broader risk-on rally recedes, it should increase the appeal of Colgate as a defensive with stronger earnings momentum

Reiterate Buy on Colgate with unchanged target price of Rs 1800:

HSBC makes marginal changes to their FY21-23 estimates to reflect the trends they observed in Q3. This doesn’t impact our DCF based target price of Rs 1800, and they retain their Buy rating on Colgate.