Colgate-Palmolive India: Nomura maintains 'Buy', cuts target price to Rs 2,175

Higher advertising spend weighs on operating profit Colgate-Palmolive India's sales grew 12.3% year on year in Q2, supported by volume growth of around 8% and pricing growth of around 4%. Volume growth was largely in line with Nomura's estimate of 9%, while sales growth was slightly below its and Bloomberg consensus estimates of around 14% and 13%, respectively. The company increased advertising spending by 40% year on year to drive premiumisation.

Its initiatives included a Harry Potter-themed oral care range for children and adults, a Bluey-themed toothpaste in a vacuum-locked pump dispenser, expanded communication for Colgate Visible White as a "Beauty Secret" and partnerships with athletes for Colgate Total. Nomura expects the aggressive advertising expenditure to support the company's premiumisation strategy and sustain high-single-digit volume growth.

Combined with a 4% price increase, this should help maintain double-digit sales growth in FY27, the brokerage said. Premiumisation and cost savings support gross margins Gross profit margin expanded 45 basis points year on year to 69.9% in Q2, supported by price increases, premiumisation and savings under the company's Funding the Growth programme. Colgate-Palmolive had previously indicated that premium products carry margins around 400 basis points higher than the overall portfolio.

However, the 40% increase in advertising spending and a 160-basis-point impact from the inverted duty structure under GST weighed on operating profitability. The operating profit margin contracted 285 basis points year on year to 27.8%, below Nomura's forecast and Bloomberg consensus of 29.9%. EBITDA grew just 1.7% year on year, compared with Nomura's and Bloomberg consensus estimates of 11% and 10%, respectively.

Nomura noted that the company had indicated at its annual meeting that it would prioritise sales growth over profit growth and step up advertising expenditure. While this is likely to affect near-term operating profit growth, the brokerage believes it could support future volume growth. GST relief could support margins from mid-Q3 The recent GST Council recommendation to allow refunds of accumulated input tax credit on input services under the inverted duty structure could help Colgate-Palmolive partially reverse the margin impact from the middle of Q3FY27, Nomura said.

The brokerage expects this relief, along with sustained sales growth, to support double-digit EBITDA growth in FY28. Nomura cuts target price to Rs 2,175 Nomura cut its FY27-29 earnings per share estimates by 4% to account for higher advertising expenditure. It now values Colgate-Palmolive at 35 times December 2028 estimated earnings, compared with 42 times earlier, and has rolled forward the valuation period from June 2028.

The revised multiple represents a 15% discount to the company's 15-year average price-to-earnings ratio. Nomura expects FY27 earnings per share growth of 6% year on year and forecasts an EPS compound annual growth rate of 10.2% over FY27-29. The brokerage lowered its target price to Rs 2,175 from Rs 2,550 while retaining its 'Buy' rating. Key risks include weak volume growth and margins.