Colgate beats expectations on consistent volume growth in Q3

Colgate Q3 earnings analysis: Colgate-Palmolive's December quarter (Q3FY24) performance exceeded expectations, showcasing steady growth driven by strategic pillars and a premium product push, analysts said. 

The company reported an 8.2 per cent growth in revenue, with earnings before interest, tax, depreciation and amortisation (EBITDA) and profit after tax (PAT) surging by 30.7 per cent and 35.7 per cent, respectively. 

Meanwhile, the domestic sales saw an 8.8 per cent increase, attributed to a combination of approximately 3 per cent volume growth, a premium product mix, and a 5 per cent price hike.

Colgate's management highlighted the success of various initiatives contributing to consistent growth, particularly in the toothpaste category, where volumes are gradually picking up. 

Notably, the relaunch of Maxfresh with a proprietary formula infused with unique cooling crystals, stressing the company's commitment to driving toothpaste volume growth through consumer education and increased brushing frequency.

While premium toothbrushes maintained strong growth momentum, the economy segment faced volume pressure, the brokerage firm Centrum noted.

Gross margin saw an annual increase to 72.0 per cent, and despite higher advertising and employee costs, EBITDA margin reached 33.1 per cent, reflecting a notable expansion.

In terms of revenue composition, domestic sales grew by 8.8 per cent, while exports declined by approximately 15 per cent. The growth drivers identified by the company include strategic initiatives yielding double-digit growth, the Maxfresh gel relaunch, and the consistent performance of the Colgate Dental Cream (CDC) Rs 20 pack in rural areas.

Colgate's focus on the "Grow-the-core" strategy involves building science-backed superior products for premiumisation, expanding the freshness/therapeutics segment in the south, increasing toothpaste penetration, boosting advertising spending, and diversifying beyond oral care using the Palmolive brand.

The sharp improvement in gross and EBITDA margins, along with the focus on key product lines like Maxfresh and premium portfolios in urban markets, contributed to the positive performance. 

Challenges remain

However, challenges persist, including rising competition in the toothbrush category, especially from Oral-B, and weaker markets in central India and UP, the brokerage firm highlighted.

Despite increased advertising spending, operating margins may face limited upside, with the company expected to maintain promotion intensity in the face of heightened competition.

Colgate-Palmolive's growth outlook relies on category development, product portfolio diversification, increased consumption frequency, and rural market penetration, Centrum added.

Analysts remain cautious, considering potential headwinds from changing competitive landscapes, particularly in the economy toothbrush segment, and uncertainties in export revenues. 

The company's resilience in urban markets and the gradual recovery in rural markets, coupled with favourable input costs, are expected to drive continued growth.

Earnings projections for Financial Year 2024 estimate- Financial Year 2025 estimate (FY24E/25E) have been revised upward by 5.2 per cent/2.9 per cent, and a ‘Sell’ recommendation is maintained, with a revised Discounted Cash Flow (DCF)-based target price of Rs 2,065

Key risks include potential weakness in demand leading to a decline in toothpaste volumes and rising inflation in key raw materials/packaging materials, analysts said.

As of 10:05 am, shares of Colgate were trading 1.25 per cent higher at Rs 2,468.10 per share.