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Emkay Global
Colgate Palmolive (Buy)
Target: ₹1,765
CMP: ₹1,547.45
Colgate Palmolive has reported a 9 per cent miss on earnings in Q2 due to lower gross margins amid higher input costs and higher ad spends. Volumes grew about 4 per cent with sales growth of 5 — 2 per cent below our estimates. Sequential recovery in volumes has been healthy, with toothbrushes witnessing good growth. Colgate has stepped up its aggression and innovation efforts, with differentiated products (diabetics toothpaste) and natural range (Vedshakti mouth spray etc). However, these steps are yet to drive improvement in growth trends.
Gross margin declined sharply by 230 bps q-o-q due to higher input cost pressure, which is likely to continue. Input inflation, led by crude and crude derivatives, remains high. Hence, we reduce margin assumptions, factoring in a 120 bps decline in operating margins in FY22. Moderation in ad spends may benefit marginally. 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. We reduce FY22-24E earnings by 3–6 per cent. Post the recent correction, valuations at 37x/33x FY23/FY24 EPS appear reasonable. Rural slowdown remains a risk to estimates.
Retain Buy with a revised target price of ₹1,765 (₹1,880 earlier).
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