Colgate’s valuations get richer after top class performance in Q1

livemint.com:

₹3424.95 apiece. Colgate’s total operating revenue in Q1 rose by 13% year-on-year to ₹1,497 crore. In comparison, Hindustan Unilever Ltd’s oral care segment saw mid-single-digit value growth led by pricing.

Colgate said demand pickup in the rural markets outpaced the growth in urban markets for the second quarter in a row. This, along with good all-round performance in toothpaste, toothbrush and personal care, meant Colgate’s domestic revenue was up 12.8% last quarter. The toothbrush portfolio saw strong double-digit revenue growth.

What’s even better is that Q1’s Ebitda growth was relatively faster at 21.5% year-on-year to ₹508 crore aided by margin expansion of 238 basis points (bps) to 34%. This was despite staff costs rising by 17%. Profitability was helped by a slower pace of increase in raw material costs and other expenses.

The strong show across parameters has pushed analysts to raise their earnings estimates for this year and the next. Colgate’s efforts at category development and product innovations seem to be paying off. In FY24, Colgate’s Ebitda margin had climbed 386 bps year-on-year to 33.5%, leading to 23% growth in Ebitda.

But the path ahead is challenging. Margin expansion could be limited. “While premiumization trend will continue and aid margin improvement, we expect its contribution to be limited.

We believe if further price hikes are effected, higher than peers, it could lead to market share loss," says Mihir P. Shah, analyst at Nomura Financial Advisory and Securities (India). Thus, Colgate may not choose to use price hikes as a margin driver like it did in FY24, according to Shah.