Colgate shares settle 5% higher after hitting all-time high on Q1 earnings

Shares of Colgate-Palmolive hit an all-time high figure of Rs 3,425.90 on the BSE in Tuesday’s intra-day trade after the company reported 33 per cent year-on-year (Y-o-Y) increase in net profit in the first quarter of 2024-25, helped by demand pickup and good performance of products.

After rallying seven per cent, the stock finally settled nearly 5 per cent higher at Rs 3,361.10, in an otherwise dull market day when the BSE Sensex closed 0.12 per cent higher at 81,455.40 levels.

So far in July, the stock has rallied 20 per cent, as against 3 per cent rise in the benchmark index.

The company’s toothpaste portfolio witnessed double-digit growth driven by high single-digit volume growth (flattish in the previous four quarters). The rural market continued to display positive signs of demand recovery, and it is growing ahead of urban.

The oral hygiene product maker delivered a robust 13 per cent Y-o-Y net sales growth of Rs 1,485.8 crore from Rs 1,314.7 crore. Earnings before interest, taxes, depreciation, and amortization (EBITDA) margins remained consistent despite the higher investment in advertising, which increased by 10 per cent Y-o-Y.

The company said the quarter witnessed continued demand pickup in rural markets outpacing growth in urban markets for the second quarter in a row. Led by this and good all-round performance of toothpaste, toothbrush and personal care, domestic revenues grew by 12.8 per cent Y-o-Y for the quarter.

Gross margin continued to expand, up 220 basis point Y-o-Y to 70.6 per cent, aided by moderating raw material prices, cost savings, and price-led growth. In line with the industry trend, A&P spending was high at 10 per cent Y-o-Y. Despite this, EBITDA margin expanded 240 bp Y-o-Y to 34 per cent, Motilal Oswal Financial Services (MOFSL) said in the result update.

Colgate’s sales growth lagged staples peers from a 5-/10- year CAGR prospective. Overall growth also appears stagnant. Additionally, due to high oral care penetration (99 per cent) and competition from herbal players, Colgate has struggled to outperform.

Premiumisation in general trade and traction in the personal care portfolio have been slow, the brokerage firm said. MOFSL raised its EPS estimates for FY25 and FY26 by 6-7 per cent on the back of improving volume performance, aggressive pricing strategy, and consistent operating margin expansion.

Colgate’s stock price is up 68 per cent in the past one year (vs +26 per cent for the Nifty 50 index) as Colgate returned to a double-digit revenue growth trajectory (led by pricing/mix) and delivering around 400bp Y-o-Y expansion in gross margin and EBITDA margin in FY24, breaking the trend of lacklustre growth that had weighed on the company in the last several years.

The current stock price implies revenue growth in the high single digits for the next 15 years and EBITDA margin expansion to 40 per cent from 34 per cent currently. But given the maturity of the oral care category, high single-digit structural growth built into the valuation is already a stretch, in our view, said analyst at HSBC Global Research.

The brokerage firm believes that the risk reward of owning Colgate for each incremental run will tend towards the unfavourable. That being said, high-single-digit volume growth, pricing power, and an expanding margin trajectory suggest Colgate is firmly out of the disruption period and that its structural attractiveness has increased, it added.