Valuations and margin moderation likely to cap upsides for Colgate

After gaining over 15 per cent in the first half of the week, the stock of oral care major Colgate-Palmolive (India) has shed about a third of those gains. While the company has been an outlier in the consumer space, given a robust September quarter performance, brokerages believe that upsides could be capped on the back of moderating volume, margins, and steep valuations. 

 

Its September quarter (Q2FY25) results were better than peers in the consumer space, helped by the high single-digit volume growth in the toothpaste segment and a double-digit revenue growth in the toothbrush segment. The gains were on the back of new launches, premiumisation, a favourable base, and advertising campaigns. Volumes have been on an upward trend over the last few quarters. 

 

Abhijeet Kundu and Dhiraj Mistry of Antique Stock Broking say, “Over the last six quarters, Colgate has been able to deliver strong performance on the back of management initiatives for improving product assortment with the help of technology and higher advertising spends/promotions to increase consumer awareness and preferences.”

 

The company’s focus on driving premiumisation in oral care and building the personal care portfolio could drive long-term performance, says the brokerage.

 

Even as recent performance has been good and the long-term outlook for the sector is robust, brokerages are cautious about the near-term outlook. While analysts were working with high single-digit volume growth, the company believes that growth will be balanced with equal emphasis on volume, product mix, as well as price. The other worry is that margins would be range bound in the 31-33 per cent band while the Street was expecting it to be higher than 33 per cent. The company also highlighted that there is some slowdown in urban growth while rural growth is expected to be flatter, (no acceleration) in the toothpaste category.  

 

Centrum Research is positive for the company and has reiterated its ‘buy’ rating. The company’s growth was 1.6 times to 2.4 times in FY24 and H1FY25 as compared to FMCG peers in FY24/H1FY25 with strong growth in rural markets, driven by its strategic initiatives. The company aims to drive oral category penetration, retaining leadership using product superiority and innovation-led premiumisation. Analysts led by Shirish Pardeshi of the brokerage say that with a focus on cost savings, margins are expected to be stable, despite higher ad spends and investments to support new launches. 

 

Most brokerages are, however, cautious and believe that stock triggers would be a function of multiple factors.  HDFC Securities, which has a ‘reduce’ rating, says that further rerating in valuation multiples will be contingent upon consistent mid-to-high single-digit volume growth delivery in the core portfolio and improvement in margin profile from an already high base which will depend on the extent of premiumisation and cost optimisation. The Street will also await developments on the diversification front (personal care) beyond the oral care category. 

 

Kotak Research, too, has a ‘reduce’ rating. The brokerage points out that Colgate is relatively better placed in the FMCG pack, given premiumisation trends, stable competitive intensity, and raw material prices but valuations (47 times FY26 price to earnings) do not offer much absolute upside.