Growth sparkle missing yet again in Colgate results, sales disappoint

After 14% decline in price, attractive valuations could support stock

Among fast-moving consumer goods (FMCG) companies, Colgate-Palmolive (India) has hardly been a star on the returns front. India’s largest toothpaste maker delivered a measly 6 per cent returns over the last year, while the Nifty FMCG generated returns of about 30 per cent. Given the muted September quarter (Q2) show, the returns picture is unlikely to change soon.
 
Sales growth of 5.2 per cent year-on-year (YoY) in Q2 was below expectations. Most of the growth was on account of higher volumes that were boosted by increased promotions, while realisations came under pressure. The company highlighted good growth momentum across brands/categories with healthy volumes on a sequential basis, though the market awaits reflection of the same on growth metrics.
 
Says Ashit Desai of Emkay Global, “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.”
 
The quarter also saw its margins come under pressure. Gross margins were down over 230 basis points (bps) on a sequential basis and 132 bps YoY. Analysts at JM Financial point out that gross margins, which had grown 300 bps each over the last four quarters, dipped for the first time in nine quarters.
 
Operating profit margins were down a steeper 220 bps YoY due to higher input, marketing, and employee costs. After a 460 bps expansion in margins in FY21 to 31.2 per cent, analysts at Prabhudas Lilladher expect margins to be flat over the FY21-24 period. Other brokerages believe margins will trend down in FY22 by about 100 bps from FY21 levels.

 Valuations, however, are undemanding after the 14 per cent decline in the stock over the last three months. Colgate is trading at 37 times its FY23 earnings estimates, in line with the Nifty FMCG universe, but at a 23-32 per cent discount to FMCG peers Godrej Consumer, Britannia Industries, and Dabur India. Investors should await improvement in volume growth/market share gains in the coming quarters before considering the stock.