A question is bothering Colgate-Palmolive (India) Ltd’s shareholders. Their firm’s volume growth reached a splendid 12% in the December quarter. That may not seem a big deal, considering Hindustan Unilever Ltd’s (HUL) growth was a percentage point higher.

But Colgate’s growth comes over a high base, as growth in the year-ago period was 12%; while HUL’s growth was off a relatively easier base of 5%. But Colgate’s share was down by 2.3% on Monday, as net profit fell by 43%.

Colgate’s sales rose by just 13% in value terms, indicating that pricing and product mix have contributed very little towards growth. But that reflects the ground realities in the home and personal care market.

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Fierce competition between the leading firms is forcing companies to offer price discounts or free volumes, which affect value growth. Companies are focused on volumes and market shares, a healthier approach in the longer run, but with painful consequences in the near-to-medium term.

The sharp drop in net profit has blinded investors to one redeeming aspect—Colgate’s material costs have risen by just 3%. Unlike other consumer firms who have been hit by rising food or petrochem prices, Colgate’s material costs appear benign.

What has risen sharply is advertising and promotion (A&P) costs, which are up by 61%, and other expenditure, which is up by 48%. Operating profit margin fell by nearly eight percentage points to 16%.

Apart from this, a higher tax incidence was the other reason contributing to the fall in its net profit. Income-tax benefits from its Baddi plant in Himachal Pradesh have ended.

Colgate’s toothpaste volume growth is up by a percentage point in January-November 2010, over the year-ago period. Toothbrush volumes rose by 24% and market share in the relatively new category of mouthwash has improved.

It is not suffering from input cost inflation. A&P costs for consumer companies can bunch up in one or two quarters, depending on marketing activities (media buying may happen upfront). But these activities and their benefits may last for a longer period. So A&P costs may come down in future quarters.

If advertising costs revert to normal next quarter, Colgate’s performance should be much better. But if it does not, investor concerns may not be unfounded. After all, the stock trades at about 30 times its annualized fiscal 2011 earnings per share, which is not cheap.