Shares of Colgate-Palmolive (India) Ltd lost 1.43% on Wednesday, despite the company reporting healthy earnings for the December quarter. Operating profit, or Ebitda (earnings before interest, taxes, depreciation and amortization), rose 18.9% from the year-ago period. Ebitda margin expanded 326 basis points, as Colgate benefited from low raw material costs and promotional expenditure. Net profit rose 21.8% to about Rs.159 crore.
Still, as the fall in the share price indicates, the performance did not impress investors. The disappointment comes from weak sales growth, which at 1.8% is anaemic. The phaseout of fiscal benefits in Himachal Pradesh impacted growth. Apart from that, organic revenue growth is at 7%, the management said in a statement.
That does not fully explain the deceleration in volume growth from 3% in the September quarter to 1% in the last quarter. In the December 2014 quarter, toothpaste volume grew 5%. Colgate did not specifically give toothpaste volume numbers for the last two quarters. But considering that dental creams constitute a major portion of its sales, the deceleration in volume growth is palpable.
According to the company, de-stocking in certain accounts and floods in Chennai impacted the shipments. Apart from that, it strengthened its market share in the toothpaste business by 60 basis points from the previous year. But although Colgate has been reporting slight market share gains for the past several quarters, these gains were unable to arrest the slowdown in sales and volumes.
Two factors may be leading to this situation. One, the competition may have intensified—not only from industry peers, but also from others like Patanjali. Two, the market itself may not be growing much. According to analysts, growth in rural India has slowed significantly. Consumers are moving to other alternatives or maybe simply trading down. “(Rural growth) continues to be lower-than-past trends and has not witnessed an improvement. Rural expansion, which was aggressive in the past, and thereby contributing to higher rural growth, has also slowed down,” SBICAP Securities Ltd said in a note last month after meeting the management.
With Wednesday’s loss, the stock is down 11% over the past one year. The earnings per share estimates for this fiscal year and the next peg the stock’s valuations (price-earnings) in the range of 32-38. Though not cheap, the stock has a history of trading at premium valuations due to steady growth and an MNC parentage. But with one key component of earlier assumptions—a steady growth—coming under threat due to rural slowdown and competitive intensity, the stock may find it difficult to gain positive momentum, till the time the company brings vitality into sales and volumes or proves that it is withstanding the slowdown and the competition better.
The writer does not own shares in the above-mentioned companies.