Volume gains key for further rerating in Colgate-Palmolive India stock

The stock of Colgate-Palmolive, India’s largest oral care company, slipped 3.8 per cent on Tuesday given the lack of traction on the volume front and downgrades due to valuation concerns after the recent rally.

Colgate-Palmolive (India) has been one of the top gainers in the consumer space since June 2023, enriching investors by 53 per cent in this period. 

While revenue growth for the company in the quarter at 8 per cent was led by pricing, the volume trend continues to be uninspiring.

Overall, the volumes were down as compared to the expectations of a 2 per cent growth.

On the domestic front, sales growth of 8.8 per cent included a slight improvement in volumes as compared to the year-ago period. The domestic sales growth was led by a double-digit improvement in toothpaste, which was offset by the decline in toothbrushes in this period.

Analysts led by Mehul Desai of JM Financial Research believe that there is no material acceleration in sales performance.

Normalised sales growth over the last four years stood at 5.1 per cent during the December quarter and this is in the same 4-5 per cent ballpark as seen in recent quarters.

Volume growth, too, has been sluggish. Kotak Research says while Colgate’s revenue growth in Q3 is likely among the best in the staples pack, we note that its volume growth continues to lag peers — Hindustan Unilever, Godrej Consumer Products, and Dabur. 

Similarly, Motilal Oswal Research points out that toothpaste volumes in the quarter were flat to positive. Despite numerous product innovations and marketing efforts, the rebound in volume remains uninspiring, it adds.

Analysts led by Naveen Trivedi of the brokerage point out that sales, operating profit, and net profit for the 10 years ending FY23 stood at 9 per cent and 8 per cent respectively.

The overall growth seems stagnant with anticipated volume growth expected to be muted in the future.

Additionally, due to the high oral care penetration and competition from herbal players, the company has struggled to achieve volume growth for several years.

Moreover, the premiumisation in general trade and traction in personal care has been slow, they add. 

Though the volume growth was not impressive, the company registered strong profit growth and margins in the quarter.

Its gross margins expanded by 639 basis points year-on-year (Y-o-Y) and 341 basis points sequentially to all-time high levels of 72 per cent.

This was over 300 basis points better than what brokerages were working with. The gains came on the back of soft input costs and price hikes taken by the company on the premium portfolio during the quarter.

While advertising expenses were up by 150 basis points at 14.6 per cent of sales, other expenses were down 90 basis points at 16.1 per cent.

This has helped the company retain the bulk of the margins at the operating level. Operating profit margins expanded by 550 basis points to 33.6 per cent. 

While operating profit was up 30 per cent Y-o-Y, the margin base is expected to catch up from the March quarter onwards.

We expect profit growth momentum to slow to high single-digit or at best low double-digit, which, in our view, could start to cap stock performance from here on, says JM Financial Research. 

Most brokerages have a cautious view of the stock given the 24 per cent gains on the stock post the September quarter results and valuations, which are higher than its five-year average.