Margin gains to continue for Colgate

Subdued input cost inflation and lower ad spends to help: Analysts

 

In line with bigger peers like Hindustan Unilever (HUL) and ITC, Colgate-Palmolive, fell short of expectations, albeit only a little, in the December quarter. Lower-than-expected volume growth, subdued other income and a higher tax rate were key reasons. Net sales (up 11.8 per cent over a year) to Rs 989 crore were a tad shy of the Bloomberg consensus estimate of Rs 995 crore. Pricing growth was seven per cent, reflecting gains from premiumisation. Net profit stood at Rs 131 crore (up 15.8 per cent over a year) and was 2.3 per cent short of the Rs 134 crore estimates.

Operationally, the results were in line. The silver lining was an Ebitda (earnings before interest, taxes, depreciation, and amortisation) margin expansion of 266 basis points (bps) over a year, to 19.7 per cent. Savings in advertising costs (down 260 bps to 18 per cent of sales) and raw material costs (down 227 bps to 30.2 per cent) fuelled the expansion. The fall in ad spends is partly due to a high base in the December 2013 quarter, amid higher competition after Procter & Gamble's Oral-B launch.

The oral care category has been under pressure over the past few quarters due to weakening demand. Though, Colgate's volume growth (five per cent) fell short of the Street expectation of six-eight per cent, it is better than peers. Despite already being a leader in the toothpaste segment, the company improved its market share by 80 bps to 56.7 per cent. A large part of the gains were driven by upgrading of toothpowder users to the toothpaste segment. In the toothbrush segment as well, market share increased 80 bps to 42.4 per cent.

A fall in other income and a higher tax rate (up 185 bps to 28.9 per cent), however, more than offset the margin gains, leading to lower than expected net profit growth.Analysts are pricing in Ebitda margin gains of 90 bps and 160 bps to 19.5 per cent and 21.1 per cent in FY15 and FY16, respectively. Benign input costs, even as advertising and promotional spends revert to normal, will drive margin gains. Importantly, a pick-up in consumption demand could elevate volume growth to 10 per cent in FY16 and FY17, believe analysts.

The stock had gained almost 10 per cent in less than a month. After the results on Friday, it fell 0.6 per cent to close at Rs 1,911. At these levels, the scrip is trading at 38.2 times the FY16 estimated earnings. While these valuations indicate near-term upsides are limited, analysts remain positive, given the company's strong brand positioning, resilient margins and improving prospects. 'Buy' on declines, they recommended.