Earlier this month, Colgate-Palmolive (India) Ltd’s shares hit an all-time high of Rs1,031 on the National Stock Exchange. It now trades at Rs993, not much lower than the record levels.
In this backdrop, the company’s June quarter results come as a disappointment. Operating profit fell by 15% year-on-year, owing to raw material cost pressures and increased investments in advertising and sales promotions.
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No doubt, volume and revenue growth continue to be healthy at the firm. Volumes of the mainstay toothpaste business grew by 14% and overall volumes grew by 12%. The fact that overall volume growth is lower is indicative of the weakness in the toothbrush segment, where the firm has been losing market share.
Price realizations hardly played any role in its 15.5% revenue growth. As pointed out in this column last month, Colgate’s volume-led growth is better than price-led growth as it is sustainable.
But, as the company’s results in the past few quarters have demonstrated, sustaining high volume growth involves a rather high cost. In the June quarter, margins fell by as much as 755 basis points (bps). This comes on the back of a nearly 300 bps drop in margins in the March quarter.
One basis point is one-hundredth of a percentage point.
The company has been facing cost pressures on the raw materials front. Last quarter, raw material costs rose by over 300 bps as a percentage of sales.
Advertising and sales promotion costs were equally responsible for the sharp drop in margins. They also rose by over 300 bps as a percentage of sales.
The company has launched some new products, such as Colgate Sensitive Pro-Relief, which seem to have added to its brand-building and advertising costs.
One could argue that these are somewhat one-off costs and would not recur at the same levels. Even so, Colgate operates in a highly competitive industry, and maintaining market share will involve high spends on advertising and promotions (A&P).
Besides, as a report by Emkay Global Financial Services points out, “New launches like Colgate Plax Sensitive mouthwash, Colgate Sensitive Pro-Relief toothbrush and Colgate Plax complete care mouthwash, and higher competitive activities are likely to keep A&P spends higher.” Emkay has forecast earnings per share growth of 10% and 15% in the next two fiscals.
Colgate shares trade at a price-earnings multiple of as high as 35 times past earnings. This seems to be quite an outsized premium for delivering consistent volume growth.
Graphic by Sandeep Bhatnagar/Mint
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