Lower costs save the day for Colgate

On a lacklustre day of trade, the stock of Colgate Palmolive gained about 4.25 per cent to feature among the day’s top gainers on Thursday. The June quarter (Q1) results, which were in line with expectations, supported the stock gains. Net profit in Q1 grew by 8.6 per cent year-on-year (y-o-y) to Rs 136 crore, despite revenues slipping by 2.8 per cent y-o-y to Rs 1,110 crore. Lower revenues were mainly due to another quarter of decline in sales volumes. Q1 volumes were lower by five per cent y-o-y. But, analysts had anticipated a fall of 8–10 per cent due to the roll out of the goods and services tax (GST). While this is the third consecutive quarter of falling volumes, when seen against the December quarter performance, which witnessed about 10 per cent volume de-growth, Q1 volumes seem to be stabilising. 

Market share, too, seems to be shrinking, though Colgate maintained its No.1 position even in Q1. Overall market share in the toothpaste segment dipped to 54.3 per cent from 55.1 per cent in FY17. Likewise, the market share in the toothbrush segment fell to 45 per cent as against 47.4 per cent in FY17.  

However, despite these shortcomings in Q1, Colgate's financial performance deserves appreciation. The June quarter was largely supported by the benign cost structure maintained by the company. For instance, the cost of goods sold declined by 19 per cent y-o-y to Rs 313 crore, while advertisement costs and other expenses fell by eight per cent and four per cent to Rs 143 crore and Rs 181 crore, respectively. Thus, overall operating expenses dipped by over three per cent in Q1 and operating margins improved by 140 basis points y-o-y to 19.8 per cent. 

On the whole, analysts seem to be pleased with Colgate’s Q1 show during such challenging times. 

Going forward, their confidence appears to be on the rise, given that Colgate has the first-mover advantage in terms of reducing its selling price to readjust with the GST regime as it undertook a price cut of 7–11 per cent on July 1, to pass on the benefits of the lower GST rates.

Analysts at ICICI Securities feel Colgate’s move creates a level playing field, providing it a competitive advantage over other key players, who enjoy tax benefits on account of their ayurvedic proposition and may be restricted from implementing a similar price cut. 

However, for now, the concern is whether Colgate’s premiumisation strategy is yielding the desired benefits. With margins drawing strength from lower costs, analysts feel higher-end products, such as Colgate Total, Sensitive and Whitening, may take longer to establish the right market acceptance. Till then, Colgate Palmolive’s mainstay products, such as Colgate Dental Care, Max Fresh, and Active Salt, along with the toothbrushes portfolio, remain the key revenue drivers. Therefore, while analysts are positive, considering the steep valuations of 47 times FY18 price-earnings, they suggest investors stay put on the stock and not take fresh exposure till the impact of the GST is fully priced-in.


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