(Photo: Pradeep Gaur/Mint)
(Photo: Pradeep Gaur/Mint)

Colgate-Palmolive’s Q3 keeps investors smiling

  • December quarter volume growth came in at 7% year-on-year, consistent with what was seen in the September quarter
  • Volume acceleration may have got a boost from its naturals portfolio toothpaste, Vedshakti

Colgate-Palmolive (India) Ltd’s investors are a happy lot so far this fiscal year, with the company’s stock price rising by 25% to 1,321.90, outperforming the Nifty FMCG (fast-moving consumer goods) index.

The December quarter (Q3) results announced on Thursday have also not brought many unpleasant surprises. The company, famous for its Colgate brand of toothpastes and other oral care products, rinsed out a satisfactory quarter, broadly meeting expectations.

December quarter volume growth came in at 7% year-on-year, consistent with what was seen in the September quarter. Analysts at Kotak Institutional Equities were expecting a volume growth of 5% .

In the base December 2017 quarter , Colgate’s volume had increased by 12% on a favourable base. “This implies that there is improvement in volume growth compared to earlier quarters when the company was struggling to grow on a favourable base," pointed out analysts at Dolat Capital Market Pvt. Ltd.

Volume acceleration may have got a boost from its naturals portfolio toothpaste, Vedshakti. “The intensity from Patanjali Ayurved Ltd has reduced comparatively in recent quarters, giving Colgate a breather," said an analyst who did not want to be named. Baba Ramdev’s Patanjali is a key competitor in the naturals segment for Colgate.

However, not everyone is impressed with Colgate’s volume growth. The company’s growth rate is improving, but it is still below FMCG leaders such as Hindustan Unilever Ltd (HUL), says Naveen Kulkarni, senior head of research at Reliance Securities Ltd. HUL had reported volume growth of 10% for the December quarter.

(Graphic: Naveen Kumar Saini/Mint)

Overall, Colgate’s revenue for the December quarter increased by 6% over the same period last year to about 1,100 crore. Realizations have been impacted because of promotional offers such as the buy-2-get-1 scheme for some products.

On the brighter side, Ebitda (earnings before interest, tax, depreciation and amortization) margin increased by 120 basis points to 28.6%. A basis point is one-hundredth of a percentage point. Ebitda performance was helped by a decline in employee costs and the relatively slower pace of increase in advertising and other expenses. Better operating performance and a much slower rate of growth in depreciation costs meant Colgate’s pre-tax earnings rose by 12% year-on-year to 282 crore.

Colgate’s share rose almost 1% on Thursday, a generally upbeat day for the markets. The stock has already appreciated by a good measure. That also means it isn’t available cheap, trading at 43 times estimated earnings for the next fiscal year, according to Bloomberg data. Some bit of the optimism is also on account of investors being gung-ho on the broad consumption theme playing out.

More particularly, Colgate will have to continue to be persistent on volume growth and improving market share for valuations to sustain at these elevated levels.

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