Recovery in rural India, market share key for Colgate-Palmolive growth

Management optimistic about growth as stock valuation stays unchanged for India's largest oral care company

The July-September quarter results of the country’s largest oral care company, Colgate-Palmolive (India), was marginally below Street estimates on the revenue front, while its margin performance came up rather short.

The consumer products company reported 2.6 per cent growth year-on-year (YoY) to Rs 1,378 crore; this was up 15.9 per cent on a sequential basis.

Most analysts had pegged their estimates closer to the Rs 1,400-crore mark and believed the company had possibly witnessed a volume decline of 1-2 per cent in the quarter on account of rural slackening and inflationary strain.

The company, however, indicated its sales are on an upward trajectory, but it remains ‘cautiously optimistic’.

Says its Managing Director (MD) and Chief Executive Officer (CEO) Prabha Narasimhan, “The current quarter has seen improved momentum versus prior quarters, driven by focused deployment of initiatives during the festival season. Core brands continue to report healthy growth.”

Nomura Research, however, believes that growth has been pallid. Says research analyst Mihir P Shah of the brokerage, “Notwithstanding core brands like Strong Teeth, Active Salt, and Max Fresh undergoing relaunches in the fourth quarter of 2021-22, with improved formulations, growth has been anaemic over the past couple of quarters.”

The company is looking at launches and niche segments to expand its share, especially in the ayurvedic category. However, they are still relatively small contributors to the overall revenue and may not materially shift the general growth trend in the near term, says Shah.

The company indicated it remains ‘cautiously optimistic’ on the sweeping growth trend, especially in rural areas, and is buoyed by growth in modern trade and e-commerce businesses in the current quarter.

How the growth trend unfolds, especially on the volume front, will be a fundamental factor to watch out for. Volumes have been declining YoY over the past three quarters.

Says research analyst Vishal Punmiya of Nirmal Bang Research, “We will continue to monitor the growth momentum, particularly after the festival season. The company has the potential to gain market share in the toothpaste portfolio, with its strong distribution set-up, focus on innovation, and the power to spend higher on the category vis-à-vis peers.”

Its pricing strategy (volume gains versus pricing/margins) will also be crucial, given that over 40 per cent of its revenue comes from the rural segment that is currently feeling the squeeze.

The Street was surprised by the sharp gross margin contraction at 310 basis points (bps) YoY and 260 bps sequentially to 63.8 per cent due to the high cost of raw material inventory.

The pressure at the gross level, however, did not have much of an impact at the operating profit level, with margin contraction limited to 23 bps, compared with the year-ago quarter. Lower spending on advertising and staff costs, which fell 10-15 per cent individually YoY, helped staunch the bleed in profitability.

In addition to margins, the Street will keenly watch out for strategies to be chalked out by its MD and CEO Narasimhan to drive profitable growth. Continued weakness in rural markets and the inability to decisively win in the natural segment remain the prime pain points for Colgate-Palmolive (India), says JM Financial Research.

What, however, works for the stock are its undemanding valuations. Given the muted earnings growth estimates for the company among peers, a shift in investor sentiment towards the stock will depend a lot on its ability to deliver growth.