Colgate's market share up at cost of margins

The company missed profit forecasts for June 2013 quarter, hit by higher promotional activity. Valuations, too, appear full

Colgate reported lower than expected results for the June quarter on both sales and net profit. Lower than expected sales, higher advertising spending and Ebitda (earnings before interest, taxes, depreciation and amortisation) margin contraction (226 basis points to 19.2 per cent) dragged the performance down.

A one-time gain of Rs 71 crore (towards sale of Global Shared Services Organisation to Colgate Global Business services, a 100 per cent subsidiary of the parent) boosted its reported net profit to Rs 185 crore, up 57.7 per cent over the June 2012 quarter. Prior to exceptional items (Rs 55.5 crore net of capital gains tax), the profit before tax is up just 4.6 per cent year-on-year, to Rs 171 crore. After adjusting for these gains, the net profit is Rs 130 crore, short of the consensus Bloomberg estimate of Rs 134 crore.

V. Srinivasan, fast moving consumer goods analyst at Angel Broking, says, "The results were slightly below estimates. Strong volume growth was offset by lower realisations (due to higher discounts offered during the quarter), resulting in lower sales growth. We believe margins will continue to be under pressure in the medium term.

The good part is sales growth was healthy at 15 per cent (Rs 860 crore), aided by volume growth of nine per cent, which comes on the back of strong volume growth of 11 per cent in the June 2012 quarter.

Colgate, thus, managed to expand its toothpaste volume market share to 55.9 per cent in the January-June 2013 period from 54.7 per cent in the year-ago period. Colgate's volume market share in toothbrushes, too, has expanded to 41.4 per cent as compared to 38.7 per cent during the period.

These achievements, however, came at the cost of margins. Colgate saw ad spends rise (up 63 basis points or bps, to 12 per cent of sales). Analysts say higher promotional expenses also pushed its other expenses to 24 per cent of sales (up 393 bps), adding more pressure on the margin. Though this aggressive promotional strategy allowed Colgate to compete efficiently with peers, as well as Procter & Gamble, the latest entrant in the toothpaste segment, it sliced away the  margins. Lower employee costs (down 114 bps to 7.3 per cent of sales) and input costs (down 56 bps to 30.2 per cent of sales), though, provided some cushion to the margins.

After the results announcement, the scrip fell about four per cent to Rs 1,383 on Monday but recovered some ground to close the day's session at Rs 1,418, down 1.5 per cent. The Sensex fell only 0.86 per cent on Monday. At Monday's closing price, the scrip trades at 32 times FY14 estimated earnings, which is higher than its three-year average one-year forward price/earnings ratio of 28 times. Rich valuations indicate limited gains from current levels. In fact, of the 14 analysts polled by Bloomberg in July so far, just two had a ‘buy’ rating on the  scrip, with the rest divided equally between ‘neutral’ and ‘sell’ ratings. The average target price is Rs 1,377, which is three per cent lower than Monday's close.

The trend is likely to continue. Positively, the oral care segment has not slowed, given the relatively lower penetration of toothpaste in the rural markets. Colgate plans to increase penetration in the latter and focus on the chemists’ channel.