GST gives Colgate new wings but will it fly?
Colgate-Palmolive (India) Ltd’s shares rose by 4.4% on Thursday, as the Street reacted to its profit for the June quarter, which rose by 8.5% from a year ago. Hopefully, they did read a note to its accounts about a tax reversal of Rs7.8 crore. Adjust for this and its net profit growth settles at a more sedate 2.3%, and its net profit is just a shade above the consensus estimate polled by Bloomberg. Still, this is a decent performance as sales declined by 3.6% over a year ago.
All fast-moving consumer goods (FMCG) companies have seen sales growth get affected by destocking in the run-up to the launch of the goods and services tax (GST). This is true for Colgate too but with a twist. Colgate said its volume growth fell by 5%. That’s a good sign. If value sales declined less than volume sales did, it probably indicates an improved sales mix.
This is corroborated by the fact that input costs fell by more than sales did. On top of this, Colgate also managed to cut employee costs, and lowered advertising and other expenses. Lower volume may be responsible, in part, for lower expenses.
The net result was a 5% increase in its Ebitda (earnings before interest, taxes, depreciation and amortization), while the margin rose by 1.8 percentage points over a year ago. Sequentially, Ebitda margin did decline by 87 basis points but can be condoned, considering it operated on lower volumes. Colgate’s profit before tax rose by 3.8% over a year ago.
The story so far in Colgate has been one of fending off the assault by Baba Ramdev’s Patanjali Ayurved Ltd on its oral care franchise. Market share has declined as a result.
Seeing if the situation has improved is made difficult by disruptions in the past few quarters; first by demonetization, and now by the GST rollout.
GST brings up the twist in Colgate’s tale. Taxes on oral care, along with others such as soaps and detergent bars, have been lowered. Colgate is among the few companies with a single-category focus, with a negligible contribution from its other category of cosmetics. Multi-category companies have to contend with taxes increasing in some and reducing elsewhere.
Colgate faces no such dilemma. It has cut prices of toothpaste and toothbrushes by 8-9% from 1 July. That gives it an edge the others may not have. Colgate’s area-based tax benefits have also ended, so it does not get affected by the new refund mechanism that other companies are awaiting. On paper, Colgate’s got a good deal post-GST.
The real test is whether it can capitalize on this and use the price cuts to ramp up volume growth in FY18, and if margins remain at these levels, then earnings growth should benefit too. The September quarter should provide some early clues, but more clarity should emerge in the second half of FY18.
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