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Business News/ Market / Mark-to-market/  Colgate sales growth decelerates despite ad push
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Colgate sales growth decelerates despite ad push

The market share gains yielded limited financial benefits

Colgate maintained its leadership position in the toothpaste market. Volume share increased 90 basis points to 57.9% in the first half of the calendar year compared with the year-ago period. Photo: BloombergPremium
Colgate maintained its leadership position in the toothpaste market. Volume share increased 90 basis points to 57.9% in the first half of the calendar year compared with the year-ago period. Photo: Bloomberg

A strong sales push yielded only so much for Colgate-Palmolive (India) Ltd in the June quarter. As the company launched new products, sales promotion and advertisement costs rose 11% from the year-ago quarter. But the marketing blitz generated an organic sales growth of just 8.8%.

That growth is slower than the 12.6% increase Colgate saw in the first quarter of the previous fiscal year and also the 11% rise in the March 2015 quarter. While the company did not divulge the toothpaste volume growth figure for the June quarter, Religare Capital Markets Ltd estimates volume growth at around 3%. That would be lower than the 5% raise the company saw in the earlier quarter and also lower than what analysts were forecasting.

Colgate maintained its leadership position in the toothpaste market. Volume share increased 90 basis points to 57.9% in the first half of the calendar year compared with the year-ago period. Volume share in the toothbrush category increased 10 basis points to 42.7%. A basis point is 0.01%.

The market share gains, however, yielded limited financial benefits. As expenditure rose sharply, Ebitda, or operating profit, grew by a tepid 4%. Margins softened 26 basis points to a little less than 20%. From the March quarter, margins are down four percentage points.

The operating profit did not translate into net profit, which dropped 15% from the year-ago quarter. Profit was hit by a one-time voluntary retirement scheme expense at the company’s plant in Maharashtra. Excluding the expense, profit may have grown. But that provides little solace as operating performance lagged Street estimates by a wide margin.

Softening raw material costs had led to the belief that margins would expand from the year-ago period. As expected, input costs as a percentage of sales fell. But the drop is modest at 84 basis points. The benefits are negated by the sharp rise in advertisement expenses, which as a percentage of sales rose almost one percentage point.

The weak performance sent the stock lower only by 0.3% on Thursday. Perhaps the 1:1 bonus proposal may be providing support. Colgate trades at about 40 times current fiscal year earnings per share estimates. Though not cheap, its market leadership position in the toothpaste business and stable performance in the earlier four quarters helped the stock gain 30% in the last year. While premium valuations are the norm for MNC subsidiaries, the revenue growth deceleration can emerge as a major headwind for the stock, unless the firm’s marketing push bears fruit in the coming quarters or the general consumption trend picks up.

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Published: 30 Jul 2015, 10:03 PM IST
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