Colgate-Palmolive (India) Ltd’s financial results for the March quarter tell just one side of the story. The company’s revenue rose by 12% year-on-year, while its operating profit margin fell by nearly 3 percentage points. Rising input costs, including that of plastic packaging, have dealt a blow to profitability, while a tight rein on other costs, including wages and advertising, limited expenditure growth.

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But the real story lies within its volume numbers. In fiscal 2011 (FY11), Colgate’s overall volume growth was 12%, while sales rose by 13%. Most of its growth was volume-driven, which is sustainable. What’s more, in the March quarter, its volumes have risen by about 14%, much higher than the sales growth of 12% itself. Volume-led growth is sustainable and is much better than price-led growth.

Changing consumer habits, especially in rural areas, are one reason for higher sales growth. Dentifrice usage—that is brushing with toothpaste or toothpowder—has been rising gradually in recent years, and shot up just under 2 percentage points in the calendar year 2010 to 82% over the previous year.

The growth is mainly on the back of rising toothpaste usage, which has increased by nearly 5 percentage points to 64%. Toothpowder usage has been declining, and the shift from toothpowder to toothpaste usage has accelerated in 2010. The toothpaste market grew 11% by volume in 2010, while Colgate’s growth was about 13%.

Toothbrush usage, too, is rising, with the market growing by 28% and Colgate’s toothbrush sales rising by about 31%. Oral care companies have been conducting national campaigns to improve oral hygiene, which appears to be working.

Rural areas have become a growth driver, with contribution to Colgate’s sales rising from 35% in 2006 to 40% in 2010. The company’s new products, too, are driving growth, and its share of the mouthwash market rose to 18% in 2010 from 7% a year ago, while the category itself grew by about 60%.

A combination of new products, rising distribution reach and growing rural usage sets the stage for good growth. But inflation and competition are collectively squeezing margins and limiting the scope for price hikes. Colgate’s operating profit growth was flat in the March quarter, while its net profit growth has been affected by higher tax incidence.

In FY11, advertising costs rose by 17%, much ahead of the sales growth. Competitive pressures are not about to ease, which makes price hikes a difficult proposition, and cutting back on advertising costs is also not practical. Though Colgate appears in a strong position relative to competition, unless input costs fall, margin pressures are likely to continue in FY12.

Graphic by Yogesh Kumar/Mint

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