After a weak Dec quarter, near-term gains unlikely for Colgate-Palmolive

A lot hinges on its ability to boost volumes amid stiff competition

Pegged back by sluggish rural demand, the country’s largest toothpaste maker Colgate-Palmolive (India) posted weak December quarter results for the 2022-23 financial year (FY23). Even as the Street had muted expectations, given its dismal growth story for some time now, the company failed to meet the lower growth estimates as well.

While analysts were expecting the company to deliver a revenue growth in the mid-to-high single digits, the topline was flat. Volumes are estimated to have declined by about 3 per cent; pricing growth has been of a similar quantum, offsetting the overall impact.

The company indicated that the toothpaste category has been impacted due to slowdown in the rural markets, increased pressure on consumer wallet due to inflation and downtrading to lower cost packs.

The urban markets have fared better than the rural segment and premium products outperformed mass brands -- as reflected in increased traction for Visible White, Charcoal and Max Fresh -- says PhillipCapital Research.

The three-year average sales and volume growth, which has been in the 2-4 per cent range, has also been weak, indicating that it has lagged the market and has been losing share.

Commenting on the performance of the market leader, analysts, led by Jaykumar Doshi of Kotak Institutional Equities, say that Colgate posted a low-single digit volume decline year-on-year (YoY) for the fourth-consecutive quarter, which is disappointing particularly in the context of the low per-capita consumption of oral care in India. 

Only 20 per cent of urban households brush twice a day and 55 per cent of rural households do not brush daily. They highlight that the company’s volume growth continues to lag other fast moving consumer goods players Hindustan Unilever (5 per cent), Godrej Consumer Products and Marico. Overall growth should improve if the rural segment recovers as this market accounts for 40 per cent of the company’s revenues.

On the margin front, the company reported an expansion in gross profit margins by 210 basis points (bps) on a sequential basis (contracted 70 bps on a YoY basis) to 65.9 per cent due to benefits of lower raw material prices.

However, operating profit margins were impacted by higher advertising and promotion costs which rose by 140 bps YoY to 13.2 per cent sales. Margins were down 170 bps YoY to 28 per cent. Prabhudas Lilladher Research believes margins have bottomed out, given flattish raw material trends and benefits of a 3 per cent price hike in the portfolio.

While the management has chalked out a strategy to boost volume growth, premiumisation and is building its personal care portfolio, Motilal Oswal Research believes that with weak revenue and earnings growth likely to sustain going forward, there is unlikely to be any re-rating.

The stock, which has lost about 2.5 per cent since its December quarter results, is trading at 34 times its FY24 earnings estimates. Investors should await volume recovery before considering the stock.