Is Colgate losing out to competition?

Concern on lower-than-average growth in toothpastes leading to slip in volume market share

A weak topline eclipsed the jump in profits of Colgate Palmolive India (Colgate) in the quarter ended December 2015, which nevertheless was partly due to tax reversal. Core performance was sub-par with net sales growing just 1.9 per cent year-on-year (y-o-y) to Rs 1,006 crore, below Bloomberg consensus estimate of Rs 1,038 crore.

Muted toothpaste volumes (up just a per cent in the quarter) were a sore point, and grew at the slowest pace in the past few quarters. The Chennai floods, unseasonal rains in south India, de-stocking in some accounts were some factors behind weak volumes. A high base effect in the December 2014 quarter (volumes grew five per cent) and discontinuation of fiscal benefits in its Baddi plant in Himachal Pradesh were others. Nevertheless, organic growth (adjusted for withdrawal of fiscal incentives) was unimpressive at seven per cent.

Rakshit Ranjan, fast moving consumer goods analyst, at Ambit Capital, says Colgate has grown slower than industry volumes of 2.5 per cent, and believes the slowing topline is a key worry. Thanks to intensifying competition from peers such as GSK Consumer (Sensodyne), Dabur (Red) and Patanjali (Dant Kanthi), Colgate has witnessed pressure on its market share.

Colgate said it has gained 60 basis points (bps) volume market share y-o-y in the toothpastes segment to 57.3 per cent in the January-December 2015 period. However, this has come off from 57.9 per cent in January-June 2015 period, indicating a drop in market share. Whether this prevails is yet to be seen, but the pressure is increasing. Analysts at Credit Suisse estimate Colgate's volume growth to remain subdued at four to five per cent over the next couple of years, with risks of a further slowdown if the Patanjali show is very strong.

Against this backdrop, it is surprising that Colgate took a sharp cut of 140 bps y-o-y in advertising and promotion spends to 15.8 per cent of sales in the December quarter. This, accompanied with a 319 bps fall in input costs to 25.6 per cent of sales aided Ebitda (earnings before interest, tax, depreciation and amortization) margin, which expanded 329 bps to 23 per cent against expectations of 21.6 per cent. A one-time tax reversal led to lower tax rate of 25 per cent against almost 29 per cent in the year-ago period. Thus, net profit grew 21.7 per cent to Rs 159 crore, higher than the expected Rs 146 crore.

Colgate scrip made a new 52-week low on Wednesday but still trades at a rich 32 times FY17 estimated earnings. Given the volume trend and competitive intensity in toothpastes, sentiments are likely to remain subdued.