Colgate-Pamolive (India): Teething problems

The strain on various fronts during the September quarter is expected to intensify further.

Colgate’s net sales grew 13.2 per cent year-on-year (y-o-y) to Rs 569 crore during the September quarter. Interestingly, sales have been growing at this rate for the last three quarters – though down from an average 18 per cent in the preceding seven quarters – and have been the key trigger to the top-line growth.

Unlike previous quarters of substantial margin expansion, operating profit margins inched merely 66 basis points (bps) to 22.7 per cent, while net profit margins slipped after nine quarters by 28 bps to 17.6 per cent due to higher operational costs (except advertising), depreciation and taxation.

Not tweaking prices despite cost inflation helped Colgate improve market share in toothpaste (89 per cent of sales) by 130 bps y-o-y to 53.3 per cent during the first half of the current financial year, while its share of the toothbrush segment (10.9 per cent) rose 170 bps to 40.5 per cent.

However, further improvement in market share looks difficult due to the entry of Procter and Gamble with globally recognised brands such as Crest and Oral B. Even Hindustan Unilever has shown renewed interest in the category by roping in Shah Rukh Khan as the brand ambassador for Pepsodent. Dabur also has strong presence in the category and caters mainly to the rural market — the next phase of growth for Colgate.

Colgate is expected to see tough times ahead due to higher input costs and advertising expenditure. Taxation costs are also expected to rise, as income tax benefits for the Baddi plant (fulfiling 50 per cent of company’s needs) decline from 100 per cent to 30 per cent. Hence, high valuations of 23 times 2011-12 estimated earnings do not match fundamentals, which makes analysts cautious about the stock.