Colgate’s robust September quarter fails to make investors smile1 min read . Updated: 21 Oct 2020, 09:06 PM IST
Analysts are doubtful of Colgate’s ability to sustain its performance as advertisement costs may surge
Colgate Palmolive (India) Ltd’s 5% year-on-year revenue growth during the September quarter was broadly in line with Street expectations. But the company, which is present in the oral care segment, has done much better on the profitability front.
Earnings before interest, tax, depreciation and amortization (Ebitda) margin expanded by a massive 541 basis points to 31.8%. One basis point is one-hundredth of a percentage point. For perspective: during the June quarter, Ebitda margin had increased by 196 basis points to 29.6%.
Analysts said September quarter Ebitda margin is the best Colgate has ever clocked. That’s despite an 18% increase in employee costs. Ebitda performance was helped by savings in input costs, advertising expenses and other operating costs.
However, the company investors remained unimpressed. Colgate’s shares closed 2.3% lower on Wednesday on the NSE post results. Sachin Bobade, analyst at Dolat Capital Market Pvt. Ltd said, “The question is whether the high September quarter margin would continue." He added, “As advertising expenses increase, there is no reason why the high Ebitda margin seen in Q2FY21 should sustain." Nevertheless, for Q2, Colgate’s year-on-year Ebitda growth stood at a robust 26.7% and pre-tax earnings grew by 32.3%.
While these growth numbers are nothing to crib about, a few are disappointed with Colgate’s revenue. That’s primarily because Hindustan Unilever Ltd saw a double-digit growth in the oral care segment. On the other hand, Colgate’s domestic net sales have increased by 7.1%.
Meanwhile, after Wednesday’s correction, the Colgate stock is around 6% away from its pre-covid highs in January. That’s fairly resilient. Based on Bloomberg data, the stock trades at about 40 times estimated earnings for FY22.
“Scope for valuations to expand could emerge from better-than-expected volume growth in the coming quarters," said Bobade.
Amid covid, demand for oral care products is expected to be relatively steady and Colgate should benefit from the trend. Market share gains too would be a trigger for valuations to expand. For now, valuations suggest investors seem to be capturing the near-to-medium growth potential adequately