Colgate-Palmolive woes deepen with market share decay; stock falls 3.6%

Topline rises 6.6%; market share declines 350 basis points in two years

Shares of Colgate-Palmolive (Colgate), which were down 10.5 per cent in the past two months until Wednesday, slid another 3.6 per cent to Rs 1,083.90 on Thursday, despite the company posting better-than-expected profit for the June 2018 quarter (Q1). 

Investors are worried about the persistent decline in Colgate’s toothpaste market share, which may keep the stock under pressure. 

Alarmingly, the degree of fall intensified with the flagship product losing 100 basis point (bps) market share, sequentially in Q1 (versus 30-80 bps fall in the past quarters). This took the overall market share loss to 350 bps over the last two years. 

Thus, overall volume growth remained flat at March-2018 quarter levels of four per cent. 

This, too, was a negative surprise for the Street, which was expecting 9-11 per cent volume growth given last year’s favourable base when Colgate’s volumes contracted by five per cent. 

Among the few positives, Colgate’s natural category (Swarna Vedshakti) performed strongly in Q1. But stiff competition from rivals, who are gaining market share, means it is unlikely to move the needle much for Colgate in the near-term.

“The market share loss is mainly from Colgate-Total and Sensitive toothpastes, resulting in a steady fall in market share. And, the momentum increased sharply in Q1. Though Colgate’s natural segment did well in Q1, leaders in this category like Patanjali and Dabur are gaining market share. So, overall impact of improved performance of the natural segment will get neutralised,” said Amnish Aggarwal, analyst at Prabhudas Lilladher. Aggarwal, who has a reduced rating on the stock, believes that Colgate is unlikely to regain its share in the near term.

The market share worries overshadowed the improvement in operating performance. 

Despite lower-than-expected increase in revenue (up 6.6 per cent to Rs 10.3 billion), Colgate clocked a sharp 39 per cent year-on-year rise in net profit to Rs 1.9 billion in Q1, ahead of Bloomberg consensus’ estimate of Rs 1.6 billion. 

This was for a sharp 432 basis points year-on-year expansion in operating profit margin to 27 per cent and was led by lower raw material expenses as well as cost-control efforts. It would be interesting to see if Colgate can give up some of its margins for market share gains. 

Unless there are positive signals from Colgate on the market share front, the stock could remain under pressure.