Colgate-Palmolive: Shining ahead of peers

Despite stiff competition, the firm maintained its leadership position in the second quarter

Colgate-Palmolive India (Colgate) posted mixed numbers for the September 2016 quarter (Q2) as revenue growth was lower than expected while margin compression was compensated by savings in taxes in the quarter. Consequently, the company’s net profit growth of 15.6 per cent year-on-year to Rs 181 crore surpassed revenue growth of 9.4 per cent (to Rs 1,048 crore) by a big gap. Thus, even as the top-line lagged estimates, net profit was higher. Bloomberg consensus estimate had pegged Colgate’s revenue at Rs 1,129 crore and net profit at Rs 166 crore. 

Colgate’s volume growth of four per cent was below analysts' expectations of 5-5.5 per cent despite it increasing advertising activities. Rising competition from the likes of Patanjali and Dabur, among others, was the key reason behind a 179-basis point surge in Colgate’s advertising spends to 12.2 per cent of sales. This effort did not go in vain as the company maintained its volume market share in both toothpaste and toothbrush segments at 55.7 per cent and at 46.6 per cent, respectively. Notably, the launch of its herbal toothpaste – Colgate Cibaca Vedshakti (priced lower than Patanjali’s Dant Kranti toothpaste) helped Colgate arrest any market share loss to Patanjali, according to analysts. While Hindustan Unilever’s oral care business continued to struggle in Q2 (particularly Pepsodent), Dabur witnessed a strong 15 per cent volume growth in its toothpaste segment and seems to be gaining market share from peers other than Colgate. 

Contrary to the Street’s expectations of a 100-basis point contraction in earnings before interest, taxes, depreciation and amortisation (Ebitda) margin, this metric fell only 33 basis points to 26.2 per cent in Q2. Input cost inflation and higher staff costs were pressure points for margin, in addition to elevated advertising spends in the quarter. Robust savings of 585 basis points in tax rate to 28.3 per cent also aided Colgate’s bottom line. 

At current levels, Colgate scrip trades at 41 times FY17 estimated earnings – higher than its historical average valuation of 35.5 times. The company is a pure play on the oral care business in India and continues to focus on innovation and brand building to protect its leadership position. By entering the herbal toothpaste segment, Colgate has added another future growth engine. Investors have always watched Colgate’s ability to maintain leadership in the toothpastes segment and this will continue to be a key focus area in the presence of aggressive peers such as Dabur.