Nomura downgrades Colgate as competition pinching margins
Colgate's market share gained in Jan-June, but its EBITDA margin declined as the company has increased its marketing and promotional spends to stay ahead of increasingly aggressive competition.
July 30, 2013 / 15:45 IST
Moneycontrol Bureau
Nomura Financial Advisory and Securities on Tuesday downgraded Colgate-Palmolive (India) to "reduce" from "neutral," saying valuations are now expensive and rising competitive intensity is expected to take a toll on the company's profitability.The maker of Colgate Max Fresh, Total and Active Salt toothpastes reported a first quarter net profit of Rs 185 crore, up 58 percent year-on-year, helped by an exceptional gain from sale of its Global Shared Services Organisation. Its net sales rose a little lower-than-expected 15 percent to Rs 845 crore.The company still remains a market leader in India's toothpaste market and its volume share in Jan-June rose to near 56 percent from 54.7 percent, a year ago. But the company has had to sacrifice margins in order to maintain its market share. EBITDA margin in April-June came down to 19.2 percent from 22.1 percent a year ago.A key reason for the margin pressure is its increased marketing and promotional spends amid increasing competition. Procter & Gamble is the latest player to enter the market with its Oral-B toothpaste. Hindustan Unilever and GlaxoSmithkline too have launched new toothpastes in the recent past. "Margins are likely to come under significant pressure over the next few quarters as heightened competitive intensity in the oral care segment is likely to remain in the near term," Nomura analysts Manish Jain and Anup Sudhendranath said.The analysts further feel that volume growth has definitely shown some signs of a slowdown even in the toothbrush category. "We believe that the recent entry of P&G into the toothpaste segment will directly hurt Colgate's profitability in FY14/15 due to a significant pick up in advertising spends and promotional activity," Jain and Sudhendranath said.Other analysts also echo similar sentiments.Standard Chartered Securities feels the volume growth in the first quarter was partly driven by pipeline filling prior to the P&G launch and continuous increase in distribution and new launch of Visible White toothpaste helped Colgate expand market share.But, a rise in P&G's aggression in toothpaste might result in further downside risk to its estimates, it added, retaining an "underperform" rating on the stock.At 10:50hrs, Colgate shares were down near 1 percent at Rs 1,395 on NSE. Discover the latest Business News, Sensex, and Nifty updates. Obtain Personal Finance insights, tax queries, and expert opinions on Moneycontrol or download the Moneycontrol App to stay updated!
