Colgate Palmolive rating: Hold – Covid-19 cast shadow on volumes in Q4

Market share gains, needed for a re-rating, may take time; ‘Hold’ maintained with target price of Rs 1,340

The 7.1% and 15.3% y-o-y dip in Colgate Palmolive’s (Colgate’s) Q4FY20 net sales and Ebitda, respectively, belied our estimates, while the 1.5% y-o-y uptick in PAT surpassed it. Reported volumes, excluding downsizing of LUPs, dipped 8% y-o-y on a base of 5%, slightly worse than our 6% y-o-y dip estimate. Two positives this quarter include: (a) Nielsen data indicating stable q-o-q market share for Colgate; and (b) company’s agile response in the current market context by launching Palmolive hand sanitisers.

Overall, although the new leadership looks promising, we will prefer to see market share gains before revisiting our recommendation. For now, we continue to prefer HUL, Nestle, Britannia and Dabur over Colgate. Maintain Hold.
Covid-19 casts a shadow on volumes.

All the company’s plants are now operational, which should aid volume growth going forward. Colgate Charcoal Clean is scaling up well in modern trade and e-commerce; this should strengthen the company’s premiumisation agenda. We are also excited to see expansion of range of products under the Palmolive brand. On the margin front, gross margin compressed 9bps y/y; however, absence of operating leverage led to Ebitda margin dipping 237bps y/y despite some savings in other expenditure (down 53bps y/y).

Q4FY20 conference call: Key takeaways
CY19 toothpaste category value growth was 4% (volume – flat); Q1CY20 value growth was 2% (volume – negative 3%). In Naturals, Colgate saw 20-30bps market share gains in MT. Toothbrush is a work in progress and going ahead will focus on innovation to gain traction.

Outlook: Gradual improvement
We expect Colgate’s innovation funnel and brand investments to keep flowing, which should help arrest market share loss; market share gains, however, may take time. We maintain ‘HOLD/SP’ with TP of Rs 1,340. The stock is trading at 39.9x FY22e EPS.