Colgate: Q4 shows non-Covid pain still high, market share recovery may drag

Down-trading, competitive intensity key concerns

The Covid-19-led lockdown has spared none, not even the personal care segment in the fast -moving consumer goods (FMCG) space. However, Colgate's March 2020 quarter (Q4) numbers, reported on Thursday, were not only below expectations, but analysts say pain for the toothpaste leader is not limited to Covid-19, and could remain.

Analysts believe that Colgate’s market share recovery could be delayed, despite the current situation offering a good opportunity to gain share, mainly from smaller/local players. Colgate’s market share loss has been a key worry for investors since the past few years. While the firm does not provide market share data, analysts are awaiting the management’s commentary in an analysts’ call scheduled on Friday.

Volume decline of 8 per cent in Q4 is not only weaker than the Street’s expectations of a 3-4 per cent fall, but it is also Colgate’s worst in the past 13 quarters. While the firm attributes its feeble volume performance to pandemic-led disruptions and indicates there is demand for its products, Shirish Pardeshi, analyst at Centrum Broking, says: “Besides Covid-19 disruptions, down-trading in the category and competitive intensity are key concerns, which could weigh on its performance”. Pardeshi also believes the firm has lost market share.

 

 

In fact, down-trading, or customers shifting to low-price products, is also palpable in the 7.4 per cent year-on-year (YoY) fall in Colgate’s Q4 sales to Rs 1,062.4 crore, implying a marginal increase in sales realisation. Analysts believe subdued performance of its premium portfolio has weighed on its Q4 performance. Reported sales are also lower than the consensus estimate of Rs 1,139.4 crore.

A dismal sales performance and higher employee and advertising expenses led to a 237 basis point YoY contraction in Colgate’s Ebitda margin, to 24.5 per cent. With this, Colgate’s profit before tax declined 16.5 per cent YoY to Rs 234.4 crore, versus expectations of Rs 250 crore, even as it was partly supported by a 64 per cent jump in other income. 

The net profit growth of 1.5 per cent to Rs 204.2 crore, however, was mainly because of lower tax rates. 

Overall, how Colgate handles the current situation in order to regain its market share is key.  After results on Thursday, the stock fell 1.3 per cent to Rs 1,334, and is currently trading at 41 times its FY21 estimated earnings.