Colgate’s near record high Q3 gross margin gives investors reason to smile2 min read . Updated: 29 Jan 2021, 11:26 AM IST
- The company posted 25% growth in net profit, but rising competition in oral care may lead to higher ad spend
For investors of Colgate Palmolive (India) Ltd, which is present in the oral care business, the December quarter results have some bright spots. First, the company saw gross profit margin expand by 417 basis points year-on-year to 69.6%. One basis point is one-hundredth of a percentage point.
“A favourable mix allowed the company to report a near record-high gross margin," said analysts from Jefferies India Pvt. Ltd in a report on 28 January. “Gross margin expansion was aided by higher toothpaste salience, lower share of exports, increased contribution from large packs and price hike taken two quarters ago."
Having said this, earnings before interest, tax depreciation and amortization (Ebitda) margin expansion was lower than gross margin. The main culprit here is the sharp 38% increase in advertising expenses. Colgate’s Ebitda margin increased by 253 basis points to 30.1%.
Even so, Colgate has beaten analysts' expectations on the Ebitda margin front. Analysts from Nomura Financial Advisory and Securities (India) Pvt. Ltd said Ebitda margins expansion is higher than its consensus estimates of about 200 basis points.
Colgate’s operating revenues for the December quarter increased by 7.8% over the same period last year to Rs1,224 crore. The company said its domestic net sales have increased by 10%. This compares favourably with 7% growth in the September quarter. For the December quarter, exports lagged, weighing on overall revenue performance.
Even so, better margin performance, strong increase in other income and lower depreciation costs led to 25% growth in net profit to Rs248 crore.
So far, so good. However, competition is a concern going ahead. “With Hindustan Unilever Ltd (HUL) appearing to have also finally got its oral-care act in place, we believe Colgate could need to be more vigilant in the marketplace to avoid relative under-performance, especially with Dabur India Ltd already having the benefit of tailwinds vis-à-vis its positioning in the naturals space," point out analysts from JM Financial Institutional Securities Ltd.
Further, investors should also watch how margins play out in future. Nomura expects higher competitive intensity in oral care (with HUL’s strong growth) to drive elevated advertising and promotion spending levels.
The Colgate stock is about 5% higher than its pre-covid highs seen in January 2020, and trades at around 43 times estimated earnings for financial year 2022, according to Bloomberg data. Needless to say, if the company continues to deliver on growth and margins consistently, there could be room for further improvement in valuations.
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