Amid consumption slowdown, Colgate-Palmolive needs a brush of love

Colgate-Palmolive (India) Ltd’s shares have declined by 14% so far this calendar year. On the other hand, the Nifty 200 index has increased by 7.4%. In general, sentiments for consumer stocks haven’t been the best thanks to the demand slowdown firms are experiencing.

In particular for Colgate-Palmolive, one of the worries has been the slow erosion in its toothpaste market share over the years. On that front, the company has told analysts after its March quarter results were published that its toothpaste volume market share has stabilized at about 52.5%. 

The key positive is that market share has now begun to stabilize over the half-year ended March 2019, wrote analysts from HDFC Securities Institutional Research in a report on 28 May. Needless to say, hereon, investors will watch improvement in the measure closely.

Meanwhile, the company, famous for its Colgate brand of toothpastes and other oral care products, coughed up somewhat lacklustre numbers for the March quarter. Revenue increased by 5.7% over the same period last year to 1,154 crore. This was largely driven by domestic volumes, grew by 5%. While this may not appear all that bad considering volume growth in the March 2018 quarter was 4%, the volume growth for the March 2019 quarter isn’t particularly impressive. For perspective: volume growth for the December quarter was 7% on a relatively higher growth in the base December 2017 quarter.

For the March quarter, Ebitda (earnings before interest, tax, depreciation and amortization) margin declined by nearly 130 basis points to about 27%.

Raw material costs increased at a relatively faster pace dragging margins down. A basis point is one hundredth of a percentage point.

Meanwhile, despite the recent underperformance in the Colgate-Palmolive stock, it’s not as if valuations are mouth-watering. Currently, the shares trade at 38 times estimated earnings for FY20, based on Bloomberg data.

As such, investors should track market share gains and volume growth. “We don’t expect the company to deliver high-single digit to low double-digit volume growth unless it begins to gain significant market share," said HDFC Securities.

Analysts from JM Financial Institutional Securities Ltd said in a report on 27 May, “While management is now targeting to regain lost shares, revenue growth trajectory in the near-term could still remain subdued given emerging weakness in demand environment."

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