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Colgate’s outlook remains subdued

The core issue of lack of sales growth, allied with the fact that Colgate has not shown any signs of regaining lost market share, will continue to delay rerating of the stock. (Photo: Bloomberg)Premium
The core issue of lack of sales growth, allied with the fact that Colgate has not shown any signs of regaining lost market share, will continue to delay rerating of the stock. (Photo: Bloomberg)

  • Colgate has a strong pipeline of product launches and re-launches. This would mean increased advertising costs to support the same. As such, it remains to be seen if such launches would help boost its revenue. Also, investors would closely track the strategic changes under new CEO

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Shares of Colgate Palmolive (India) Ltd. have declined more than 5% in the last one year in complete contrast to the 9% appreciation in its sectoral index, Nifty FMCG (fast-moving consumer goods). The company’s falling market share and muted growth have been causes of concern.

In the March quarter (Q4FY22), the company reported a modest 1.4% year-on-year (y-o-y) rise in operating revenue to 1,301 crore. In a post earnings call, the company's management said it took a mid-single digit price hike in Q4 which implies a decline in volumes in the range of low to mid-single digit.

Raw material inflation led to a y-o-y dip in gross margin by 84 basis points (bps) to 66.8%. One basis point is one-hundredth of a percentage point. However, cost control measures meant flattish Ebitda (earnings before interest, tax, depreciation and amortization) margin at 33%. For perspective, employee expenses and advertising costs, as a percentage of sales, fell 60bps and 32bps yera-on-year, respectively.

The management pointed out that inflation has weighed on consumer sentiment, more specifically in rural areas. The share of natural segment in the oral care category has stagnated. Also, high penetration levels in this category offer minimum scope for growth.

“In our view, structural growth acceleration depends on increased rural penetration and twice-brushing in urban markets, innovation in oral care as well as in personal care space, premiumization in alternate channels, and bolstering rural distribution and scale-up in chemist channel," said analysts at Kotak Institutional Equities in a report on 27 May.

The company has a strong pipeline of product launches and re-launches. This would mean increased advertising costs to support the same. As such, it remains to be seen if such launches would help boost its revenue.

Also, investors would closely track the strategic changes under the new chief executive officer (CEO). The company has named Prabha Narasimhan as its new managing director and CEO effective 1 September.

“The core issue of lack of sales growth (caused by high category penetration, especially when allied with the fact that Colgate has not shown any signs of regaining lost market share), will continue to delay rerating of the stock. This is especially with little sign of a shift from the dependence on oral care," said analysts at Motilal Oswal Financial Services in a report on 26 May.

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