Colgate chasing margins at volumes' expense

Lower ad spends, input costs help margins, even as revenue growth at multi-quarter low

Colgate-Palmolive (India) posted mixed set of numbers for the September quarter. Continued weakness in volumes due to softer consumption demand and an excise duty rise impacted revenue. Thus, net sales grew 3.8 per cent over a year to Rs 1,032 crore, with weak toothpaste volume growth of three per cent. Excluding the duty impact, the net sales grew 10 per cent, suggesting pricing gains aided the top line. Nevertheless, the numbers lagged that of peers such as Hindustan Unilever and Dabur, which saw much stronger growth in their oral care businesses. What's surprises is that Colgate reduced its advertising and promotion spending by 407 basis points (bps) to 16.2 per cent of sales in the quarter. Rising competition is another pressure point. Channel checks by analysts at Ambit Capital suggest Colgate possibly lost market share in modern trade to GSK’s Sensodyne and Dabur Red.

According to a press release, Colgate gained 90 bps volume market share in the toothpaste segment to 57.6 per cent in the January-September period, compared to the same period in 2014. However, this is a bit lower from the 57.9 per cent volume market share between January and June. Whether the trend will continue or not, analysts seem concerned at the company of raising prices and focusing more on margins.



Nitin Mathur, consumer analyst at Societe Generale, says, "We are disappointed by the three per cent toothpastes’ volume growth (our expectation was five per cent) in the quarter. The company took price increases, also partly responsible for healthy gross margin expansion but at the cost of lukewarm volume growth.” He has a ‘Sell’ recommendation on the stock, in view of the rich valuations. Ebitda (earnings before interest, taxes, depreciation and amortisation) margin expansion, though, stands out. It witnessed a handsome expansion of 594 bps, due to lower input costs (down 243 bps to 27.6 per cent of revenue), employee costs (down 128 bps to 5.6 per cent) and advertising spending. As a result, net profit grew ahead of revenue growth and the Street’s expectations. This number was Rs 157 crore in the quarter, up 20.7 per cent over the year and higher than the Bloomberg consensus estimate of Rs 139 crore. While there could be an upward revision in full-year estimates of earnings, weak volume growth and intensifying competition are concerns.

The stock rose to Rs 990 intra-day on Thursday but closed at Rs 974, a marginal decline of 0.4 per cent over the previous close. It trades at a rich valuation of 37.3 times the FY17 estimated earnings.