Strong margin gains for Colgate

Rationalisation of ad spends and benign input costs aid margins while volume growth remains stable

Colgate's revenues and earnings for the September quarter were marginally lower than consensus estimates. While net sales grew 10.9 per cent year-on-year to Rs 994 crore and bottomline was up 18.3 per cent year-on-year to Rs 130 crore as against estimates of Rs 1,017 crore and Rs 134 crore respectively.

Toothpaste volumes grew seven per cent year-on-year in line with the trend seen in the past two-three quarters. The volume growth is commendable given that overall toothpaste industry volumes fell five per cent. Toothpaste volume market share though up 80 basis points year-on-year to 56.7 per cent, slipped 30 basis points sequentially. Colgate gained about 110 basis points market share in toothbrush segment to 42.6 per cent on a year-on-year basis. The company has seen a favorable response to new launches such as Sugar Acid Neutralizer, Visible white Regimen, amongst others. Key toothpaste products namely Colgate Dental Cream, Active Salt, Max Fresh, Visible White and Colgate Total continued to witness strong traction in the quarter.

Benign input costs, price hikes as well as lower advertising and promotional spends boosted gross and Ebitda margins of the company, more than offsetting the pressure of increased staff costs. Gross margin expanded 290 basis points year-on-year to 62.5 per cent and Ebitda margin grew 240 basis points to 18.6 per cent. Lower other income (down 23.8 per cent year-on-year to Rs 10 crore) coupled with higher tax rate (up 170 basis points year-on-year to 27.5 per cent) partly offset the benefits of cost savings. Thus, net profit growth came in lower than Ebitda growth of 27.5 per cent.

While benign input costs will support gross margins, advertising spends are expected to inch up as competitive intensity increase. Most analysts expect P&G to bounce back and try and gain more market share in the tooth paste market. "Despite P&G's initial failure in the toothpaste category, we expect the company to re-launch its toothpaste with much more fervor. Though we believe that P&G will take share from No. 2 player and Colgate will retain its market share," says Harsh Mehta of HDFC Securities. He believes Colgate's current valuations of 35.3 times FY16 estimated earnings do not offer significant risk-reward.

Analysts remain mixed over Colgate given the intensifying competition and margin headwinds. Most believe significant upsides from current levels appear capped. However, strong brand equity, focus on innovation and strong return ratios are its key strengths. Analysts expect Colgate's net profit to grow at CAGR of 21 per cent over FY14-17.