Colgate results: Demonetisation, and not Patanjali, hit March quarter performance
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It was not Baba Ramdev’s Patanjali Ayurved Ltd but demonetisation that hit Colgate-Palmolive (India) Ltd’s March quarter performance. Sales growth of 2.5% in the quarter was low but better than the December quarter’s 8.8% decline. In volume terms, it was a 3% decline versus a 12% fall (December figure via Motilal Oswal Research).
Colgate blamed the decline on the collapse of the wholesale channel post-demonetisation. This channel caters to small stores in urban areas, rural markets, and deals solely in cash. This business model cracked after the note ban and fear of scrutiny from the taxman has kept it shut since.
The company’s exposure to the rural markets is relatively high. In 2010, rural markets contributed to 40% of sales by volume but this would have risen significantly as it expanded distribution. Colgate’s toothpaste penetration in rural areas had risen to 74% of households in 2014, compared to 56% in 2010.
Since urban’s share in value terms is likely to be higher, value sales increased even as volumes declined. Also, gross margins improved as input costs declined. Still overall costs rose. Colgate spent 24% more on advertising, while the full year spend was up by 14.3%. That reflects stiff competition all around although Patanjali Ayurved is the more visible threat. How did it fare on this front? Colgate’s volume market share was 55.1% in fiscal year 2017 (FY17), lower than 55.7% a year ago. That’s a 60 basis points decline. The previous year’s fall was sharper, as its share was more than 57% in FY15. Colgate’s done well to guard its gate in FY17. A basis point is 0.01%.
The 22 basis point decline in margins and 0.5% fall in profit can be attributed to lower operating leverage, since volumes declined. The new goods and services tax (to be levied from 1 July) may disrupt the supply chain next. Rural distribution holds key to revival in 2017-18, especially if the rains are good, possibly in the second half. On Monday, the company’s share dipped by 2.1%. There’s little to justify it trading at 47 times FY17 earnings when the clouds are still gathering.