Buy Colgate-Palmolive India; target of Rs 1765: Emkay Global Financial

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Emkay Global Financial's report on Colgate-Palmolive India

Colgate reported a 9% miss on earnings in Q2 due to lower gross margins amid higher input costs and higher ad spends. Volumes grew ~4% with sales growth of 5% - 2% below our estimates as higher promotional intensity resulted in lower price-led growth. Gross margin declined sharply by 230bps qoq due to higher input cost pressure, which is likely to continue. We, hence, reduce margin assumptions, factoring in a 120bps decline in operating margins in FY22. Moderation in ad spends may benefit marginally though. Colgate has stepped up its efforts but is yet to see a consistent improvement in growth trends. After few quarters of improvement, growth was slower in Q2. We expect that growth trends improve ahead with the help of innovations and GTM initiatives.

Outlook

We reduce FY22-24E earnings by 3-6%. Post the recent correction, valuations at 37x/33x FY23E/FY24E EPS appear reasonable. Retain Buy with a revised TP of Rs1,765 (Rs1,880 earlier), rolling forward to Dec'23E EPS. Rural slowdown remains a risk to estimates.

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