Investors should await clarity as Colgate reels under competitive pressure

While topline grew by 8% and net profit by 11% in Q2, margin expansion was muted despite benign input costs

Oral care major Colgate-Palmolive India's (Colgate's) September 2018 quarter (Q2) numbers may be in line with the Street's expectations but it shows that the company still reels under stiff competition.  

While net sales rose 7.7 per cent year-on-year to Rs 11.6 billion, led by a seven per cent increase in volumes, net profit grew 10.6 per cent to Rs 2 billion, almost at par with Bloomberg consensus estimates. The positive surprise was volume growth, which was better-than-expectations of a four-five per cent growth. However, it was partly supported by the low base of last year when volumes had contracted by a per cent. Secondly, after eight quarters of decline, the market share of its key segment -- toothpaste -- improved, but very minutely, to 52.5 per cent as of September 2018, from 52.4 per cent as of June 2018. 

The flip side is that the muted market share gain was despite Colgate sacrificing on profitability, given high promotional costs and absence of price hikes. This did not go down well with investors as the stock, which fell 1.7 per cent intra-day post results, closed almost flat at Rs 1,106. 

The volume-driven topline growth also shows there is dearth of significant pricing power given the stiff competition from players such as Dabur and Hindustan Unilever, among others. Colgate had to cut prices of some its brands like Swarna Vedshakti, says an analyst, to win customers.   

Operationally, benign input costs helped gross profit margin expand 134 basis points year-on-year to 64.5 per cent in Q2. Raw material expenses as a percentage of net sales dropped by 134 basis points year-on-year to 35.5 per cent. However, thanks to higher advertising spends and other operating expenses, Colgate missed a notable improvement in operating profit (Ebitda) margin, which rose by 48 basis points year-on-year to 28.2 per cent. Advertising and other operating expenses as a percentage of operating income were up 91-99 basis points year-on-year. Worse, analysts expect advertising costs to remain high as Colgate continues to invest for e-commerce channels and on brand building activities. This would keep margin and earnings growth under pressure going ahead if prices are not hiked. Given that some analysts don't see any price rise due to market share pressure and some others expect selective increases in coming months, developments on this front will be keenly watched. 

For now, investors should wait for more clarity on how Colgate manages its market share and profitability in coming quarters.