After Colgate-Palmolive (India) reported higher-than-expected net profit in its quarterly earnings, brokerages shared mixed calls on the FMCG player as volume growth remained uninspiring.
Revenue grew around eight percent on-year, with the domestic business doing better. Within the domestic business, toothpaste grew double-digits, while toothbrush remained sluggish with flat revenue. “Toothpaste growth was largely price-led with underlying volume growth at low-single digits. Colgate outperformed in growth versus HUL's oral care portfolio,” international brokerage firm Jefferies said.
Eye on volumes, value growth
The toothpaste segment saw a double-digit value growth but toothpaste posted an on-year decline, with weak volumes and an unfavourable mix. “Despite numerous product innovations and marketing efforts, the rebound in volume remains uninspiring,” Motilal Oswal said.
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Nuvama Institutional Equities said the outlook could be positive, as there is large room for growth. Eighty percent of the urban market does not brush twice, while 55 percent of the rural market does not use toothpaste everyday. Therefore, the company has scope to drive volume growth. “The company also has the opportunity to expand penetration of oral care adjuncts such as floss and mouthwash,” the brokerage added.
Margins impress
Gross margins increased 630 basis points (bps) from the year-ago quarter and 340 bps from the previous quarter to 72.2 percent, reaching an all-time high. This is nearly 6 percentage points above pre-covid and pre-inflation levels.
One basis point is one-hundredth of a percentage point.
Despite higher ad-spends, the company’s EBITDA margin expanded 560 bps on-year to 33.6 percent, much above estimates and at an all-time high. It led to an EBITDA growth of 30 percent YoY, also coming in above estimates.
FMCG companies have passed on the lower input costs to customers in the form of price cuts across categories. However, in a divergence from the trend, Colgate has retained the benefits and instead, implemented price increases for premium products.
Also Read | Colgate-Palmolive India posts Q3 profit jump on lower expenses, urban demand
Stock call: buy, sell or hold?
CLSA said that the company’s ability to drive further margin expansion is limited. The brokerage maintained its "sell" call, with a target price of Rs 2,001 a share.
Motilal Oswal reiterated its "neutral" rating on the stock, with a target price of Rs 2,400, saying FY25 will be a testing period to check margin trajectory. “It seems both gross margin and EBITDA margin have elevated to unsustainable levels,” the brokerage said.
Nuvama noted that new categories such as sensitive toothpaste, natural category and mouthwash shall further enhance growth and premiumisation.
However, a key risk to the topline will be higher competition, as it will result in higher brand spends, which could put its margins under pressure. Investors should monitor Colgate’s market share data, considering the competition scenario. Rural consumers could downtrade on a slowdown.
Jefferies retained its "buy" call, with an increased target of Rs 2,930 apiece from Rs 2,820.
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