Home / Markets / Mark To Market /  Why Colgate stock makes investors smile in covid-19 times

MUMBAI: Shares of Colgate Palmolive (India) Ltd have been resilient. From its pre-covid highs in January, the stock is just about 5% lower on the National Stock Exchange. In fact, even with the pandemic, the stock touched its 2020 high in April.

Not without reason. The oral care category has broadly remained unaffected during this crisis, therefore offering a cushion to Colgate’s sales. "We think Colgate is one of the most stable companies in a very stable daily consumption category relatively unaffected by any demand shocks; we view this as a strong advantage in current unstable times," point out analysts from Nomura Financial Advisory and Securities (India) Pvt. Ltd.

In fact, Colgate’s June quarter results announced last week show that the pandemic has not rubbed it the wrong way. The year-on-year drop in revenue was contained to 4% to 1,040.6 crore, better than Street expectations. The toothpaste business saw positive sales growth last quarter. According to analysts from Jefferies India Pvt. Ltd, "Toothpaste growth was driven by better realisations along with better mix (higher size packs) - volume was down actually 2% for toothpaste."

On the other hand, the toothbrush category, being more discretionary in nature, was hit, impacting the company’s overall sales. “Toothbrush volume decline was over 30%. As a result, overall volumes declined 8% with domestic volumes down 7%," pointed out Jefferies.

Even so, Colgate did well on the margin front. It’s earnings before interest, tax, depreciation and amortisation (Ebitda) margin expanded by 196 basis points to 29.6%. One basis point is one-hundredth of a percentage point. Ebitda performance was helped by a sharp 25% decline in advertising expenses. As such, Ebitda increased 2.7% even though employee costs rose by about 9%.

Going ahead, investors will watch the market share recovery. "The defensive nature of the toothpaste category bodes well amidst demand uncertainty. We are also positive on the new CEO's growth focus, especially given the potential to regain lost market share," said Jefferies’ analysts. Though, the stock’s valuations may limit sharp upsides in the near future. Colgate shares currently trade at about 41 times estimated earnings for financial year 2022, based on Bloomberg data.

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