Colgate-Palmolive (India) Ltd is benefiting from the relative calm in the toothpaste market, with the chaos unleashed by Baba Ramdev’s Patanjali Ayurved Ltd some years ago turning into a distant memory. Sales are growing at a relatively healthy pace, profitability is improving and earnings are ticking along. The headwinds of demonetisation and the goods and services tax rollout are also behind it.
In the September quarter, or Q2, Colgate’s sales volumes rose by 7% over the year-ago quarter, when the GST rollout had caused a decline of 0.9%. A low base only partly explains the healthy volume growth. It has also come out of the phase when its volumes were struggling to pick up pace.
In value terms, sales rose by 7.7% year-on-year, indicating prices have largely been kept in check. That makes sense as inflation is not a problem on the cost front—raw material costs rose by only 3.7%. That gave it enough firepower to pump in 16.5% more for advertising and promotions, and even absorb a 14% increase in other expenses. Other expenses include items such as freight and royalty.
Colgate’s Ebitda (earnings before interest, tax, depreciation and amortization) margin increased by half a percentage point over the year-ago period, which is good considering it is accompanied by healthy sales growth. Its net profit rose by 10.4% over a year ago.
While it has seen better days in past years, this is a sign of how competitive the market has become. Apart from Patanjali, Dabur India Ltd too is being aggressive in its efforts to increase market share. Colgate’s market share in toothpaste by volume has been stable, sequentially, in the six months ended September, compared to the six months ended June. It also implies Colgate is growing more or less at the same rate as the market. Investors would like to see it do better.
If Patanjali continues to maintain a low profile, then market leader Colgate and other toothpaste makers can coast along in relative comfort. That then is the chief risk to watch out for. It may simply be pausing (a much needed one at that) to take stock and come back with a bang.
Colgate’s shares have risen by 4% in the past year, compared to the S&P BSE FMCG Index’s gain of 7%. While Colgate’s result hold out hope that the situation has stabilized, it does not yet signal a return to the glory years.