Colgate: Sheen to diminish

High base and lower penetration rates will have an impact on pricing and profitability.

After sustained growth in terms of financial performance and stock appreciation, the smiles at Colgate Palmolive are expected to fade a little. The company is likely to see its volume growth plateau. With increased competition, pricing pressure will also be unrelenting. Thereby, margins are expected to come off from the peak levels.

Over the past five years, the company’s market share has grown 450 basis points (bps) to 53.4 per cent. Incrementally, the biggest volume growth driver has been its penetration level, which increased from 46 per cent in CY04 to 59 per cent in CY09. With no major jumps at the moment, the rate is expected to be maintained. Analysts, therefore, reckon that with such a base, the company will find it difficult to sustain the volume growth it has recorded. Volumes, which grew at an average of 14 per cent in the past eight quarters, supported by Colgate Dental cream and Cibaca, are expected rise just 10-11 per cent. Moreover, since the rural segment accounts for around 40 per cent of its market, it will be difficult to pass on the price rise to customers in this price-sensitive segment.

Intense competition is expected from Hindustan Unilever, Dabur and a likely new entrant, Procter & Gamble. There are regional brands as well. According to Edelweiss Securities, “Pricing-led growth is crucial for Colgate over the next three-five years, as most incremental volume growth is coming from the low-end brand Cibaca.” Operating margins, therefore, are expected to come off the peak 27 per cent recorded in the March 2010 quarter. Also, competitive pressure will take its toll in the form of increased ad spends, which at the moment have been controlled at 10-15 per cent of sales.

At the net earnings level, the Baddi plant, which accounts for half the company’s output, will stop getting tax benefits. Subsequently, the effective tax rate is likely to rise from 16 per cent to around 24 per cent. Maintaining net earnings growth of 30 per cent (recorded during 2005-2010), therefore, is going to be a challenge.