Colgate: Losing out to competition

Colgate-Palmolive India (Colgate) witnessed a good recovery in its volumes in the March quarter (Q4) compared to Q3. Volumes were down three per cent in Q4 against a 12 per cent drop in Q3 and was in line with Street estimates. The real concern, though, is the drop in volume market share in its core business of toothpastes. For calendar year 2016, Colgate's toothpastes volume market share fell to 55.6 per cent from 57.4 per cent in 2015. For FY17, this metric stood at 55.1 per cent. Healthy growth of toothpastes business for peers such as Patanjali (Dant Kanti) and Dabur (Meswak, Red toothpaste) is a key reason behind softness in Colgate's market share.  In a post-results call with investors, the Colgate management disclosed Cibaca Vedshakti's market share stood at over one per cent in states where it has been launched. Though it has launched its natural ingredients-based toothpaste (Cibaca Vedshakti) in a few states, it is yet to gain significant market share. The company also introduced its sensitivity toothpaste with natural ingredients and is gearing up for more innovation in the naturals segment.The success of these new launches as well as Cibaca Vedshakti will be crucial in enabling Colgate to arrest the loss of market share, believe analysts.

HUL reports its numbers on Wednesday and it will be interesting to see how the company's oral care segment has performed. In this backdrop, recent price hikes by Colgate could exert further pressure on its volumes. In Q4 though, price hikes fuelled a 2.5 per cent growth in its net revenue to Rs 1,033 crore, lower than the Bloomberg consensus estimate of Rs 1,129 crore.

As the company re-invested these gains in advertising spends, its Ebitda margin came off 29 basis points year-on-year (y-o-y) to 23.7 per cent. This is a bit disappointing given that Colgate witnessed a sharp fall in input costs in Q4 (much higher than the increase in ad spends). Lower margin along with lower other income pulled down the net profit despite a lower tax rate. Net profit fell 0.5 per cent y-o-y to Rs 143 crore and lagged estimates of Rs 154 crore. 

Not surprising then, Colgate’s stock fell two per cent to Rs 994 on Monday.

Going forward, the management will continue to focus on product innovation and invest behind its brands to protect its market share. While Q4 continued to witness some inventory de-stocking, implementation of goods and services tax (GST) from July will also disrupt Colgate and its peers’ business in the near-term. These should keep the Colgate scrip, already trading at 40x FY18 estimated earnings (premium to its five-year average valuation of about 36x) under check.

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