The general consumption slowdown in the country had kept investor expectations for consumer companies under check
Colgate’s domestic sales of toothpaste and other oral care products rose 6% in Q1, on the back of a 4% increase in volumes over the year-ago period
Colgate-Palmolive (India) Ltd’s shares rose 3.1% on the National Stock Exchange on Thursday, a day when the majority of stocks fell. It is tempting to think that the company’s June quarter results gave investors many reasons to smile.
However, it is not as if Colgate-Palmolive’s results were outstanding. Rather, it is the lack of negative surprises that could have probably brought some respite to anxious investors. The general consumption slowdown in the country had already kept investor expectations for consumer goods companies under check.
“It helps that the company has met the street’s low expectations and not fallen short at a time when sentiments are already negative for consumption stocks," said an analyst requesting anonymity.
Colgate-Palmolive’s domestic sales of toothpaste and other oral care products rose 6% in Q1, on the back of a 4% increase in volume over the year-ago period. Domestic volumes had increased by 5% in the March quarter.
“Growth has seen further moderation due to the slowdown in rural markets. With Colgate’s performance not indicating an improvement in market share, and rural markets witnessing a near-term slowdown, growth is likely to remain muted, in our view," analysts at Emkay Global Financial Services Ltd said in a note to clients.
Some analysts were expecting gross profit margins to contract for the June quarter. On the contrary, the gross margin remained flat on a year-on-year basis, which is comforting. The Ebitda margin expanded by 60 basis points to 27.6%. Ebitda is earnings before interest, tax, depreciation and amortization. A basis point is 0.01%.
Adjusting for the Indian Accounting Standard 116 related changes, the company has done better than expected on the Ebitda margin, according to Nitin Gupta, research analyst at SBICAP Securities Ltd.
The Colgate-Palmolive stock has fallen by 10% so far this calendar year, despite the increase in its share price on Thursday. In comparison, the Nifty 200 index has risen by about 4%.
Besides, it is not as if the correction in the stock means valuations are cheap. Currently, the stock trades at nearly 40 times estimated earnings for FY20.
Of course, much depends on the trajectory of volume and market share growth. “Competitive intensity remains high in toothpaste given the presence of Hindustan Unilever (HUL), Dabur and Patanjali. During Q1, Colgate seems to have lost 20-30 bps share as HUL has also improved its execution in oral care while Dabur continues to grow well through its flagship, Dabur Red, franchise," analysts at Jefferies India Pvt. Ltd said in a note.
“Re-rating in the stock will require an expansion in market share in the days to come," said SBICAP Securities’ Gupta.