Colgate Vs Godrej: A tale of two CEO hires

Shares of Colgate Palmolive (India) Ltd. were unchanged on Friday on the National Stock Exchange after it announced a change of guard at the company. Colgate has named Prabha Narasimhan as its new managing director and chief executive officer (MD and CEO) effective 1 September.

Prima facie, Colgate’s investors’ response widely contrasts with the euphoria seen in May last year when Godrej Consumer Products Ltd. (GCPL) had said Sudhir Sitapati will be appointed MD and CEO. Recall that GCPL’s shares had risen 22% following the notification on 12 May to nearly ₹873 apiece.

Sachin Bobade, analyst Dolat Capital Market Pvt. Ltd, said, "In GCPL’s case, the stock did trace back to its initial levels post the heavy reaction to the leadership change. The market seems to be factoring this, which could explain the muted reaction of the Colgate stock on the change in leadership.” 

Further, investors may have anticipated relatively higher growth opportunities in the categories GCPL operates in following the change. Not only that, Nisaba Godrej, who occupied the MD’s office prior to Sitapati, is part of the promoter group and as such the change in leadership would have come as a relief because investors tend to worry about concentration of power.

As things stand, GCPL’s shares now trade at ₹710, partly bogged down by higher palm oil prices of late. Also, in general, sentiments towards FMCG stocks have been subdued recently due to elevated input cost pressures along with weak rural demand conditions. Even so, leadership changes in FMCG companies are typically viewed as exciting. CEO changes at Britannia Industries Ltd, Hindustan Unilever Ltd (HUL), and Dabur India Ltd. in the past suggest that a new leader could drive significant shareholder value.

“To be sure, a change in leadership can actually change the dynamics for Colgate. If the new CEO focuses on enhancing distribution, more advertising campaigns, and new launches it may boost volumes and growth, eventually,” says Bobade.

Narasimhan brings more than two decades of experience in various categories across consumer marketing and development roles. In her last role, she served as executive director of Home Care at HUL. 

“With market-share gains limited due to elevated competitive intensity (largely from the ayurvedic/naturals segment and HUL stepping up new launches with new formulations), we believe a fresh perspective from outside the industry can bring in cross-pollination of fresh ideas and strategies from other consumer categories,” said analysts at Nomura in a report on 10 March.

In particular, Colgate’s market share decline and muted revenue growth has been a concern. “The combination of sharp decline in market share in recent years and the increased penetration of the category itself have resulted in single-digit topline growth over the last 10 years. In recent years, premiumization has also come off, affecting realization growth (v/s the past),” said analysts from Motilal Oswal Financial Services in their Q3FY22 review report. 

The brokerage added, “For a company with a modest base of ₹2,040 crore in sales in FY10, a sales/Ebitda/PBT CAGR of 8–10% over the last 10 years is a weak result.” CAGR is compounded annual growth rate.

The bright spot, however, is that valuations are undemanding. Colgate’s stock trades at 36 times FY23 estimated earnings, Bloomberg data shows. However, near-term scope for meaningful upsides appears limited.

“Colgate is entering a low-growth period with the absence of any sustainable triggers to drive incremental growth. We await details of any new strategies from incoming CEO Ms. Narasimhan before turning constructive,” added the Nomura report.