Colgate Palmolive (India) Ltd’s shares have fallen by 2.4% in the past two days. The company, which is present in oral care category, held an analysts meet on Tuesday where it discussed its growth strategy. Though long-term prospects appear intact, the lack of exciting announcements may have caused some disappointment among investors.
Commenting on the external environment, Colgate’s management highlighted that there has been a recovery in category volume and green shoots are seen in certain rural markets. Colgate’s strategic pillars include leading the toothpaste category through volumes; driving premiumization through science-based superior innovation; leading category growth in toothbrushes and devices, and building a strong portfolio in personal care through Palmolive.
View Full Image
Colgate’s focus on premiumization augurs well. In the toothpaste category, only about 14% is considered as premium, which is relatively lower versus some other personal care categories. Further, only 22% of toothbrushes sold in India are considered premium.
However, the benefits of Colgate’s premiumization efforts are expected to reflect after a while. As analysts from Prabhudas Lilladher said, “We believe launch of premium products like Total Sensitive Toothpaste, Colgate Water Flosser, Visible White O2 TP & Whitening Pen and Colgate Periogard Toothpaste will benefit in long term only.”
Overall, it is worth noting that a chief area of concern for Colgate has been subdued revenue and estimated volume growth. For the past several years, it has clocked single-digit revenue growth (see chart alongside). As such, there is opportunity to grow in the oral care category. One is when people brush more frequently given that only 20% of households brush twice a day in urban areas. Further, 55% of households do not brush daily in rural areas.
But the challenge is that consumer behaviour takes time to alter and Colgate’s management notes this. “Management believes that habit change will be gradual, but we still see a case for aggressive investments to drive growth,” said Jefferies India analysts. “Colgate has seen 7-8 percentage point gross margin & Ebitda margin expansion over the past 10 years. During the same period, ad spend has gone up by 2 percentage points,” they said.
Meanwhile, Colgate put up a good show in the June quarter, partly helped by a soft base. Last quarter, year-on-year net operating revenue growth stood at 10.6% driven by domestic sales, which rose at a faster pace of 12.3%. But it may be too much to expect a repeat of Q1 growth. As such, analysts are pencilling in single-digit revenue growth for FY24. Prabhudas Lilladher estimates sales and profit after tax CAGR of 7.8% and 12.6%, respectively over FY23-25. To be sure, Colgate’s shares have risen by nearly 27% so far in 2023. Some of the optimism is driven by the leadership change, said analysts. Plus, margins have been robust, driven by pricing and softening input costs. In Q1, gross margin stood at a multi-quarter high at 68.4%. To that extent now, valuations are higher. The stock trades at almost 40 times FY25 estimated earnings, show Bloomberg data. “While we see a more vibrant Colgate post Ms. Prabha Narasimhan taking over as MD and CEO (since 1 Sep 2022), we believe its faith hinges on category growth and execution given it is predominantly a single-category company with significant market share,” wrote Mihir P. Shah of Nomura Financial Advisory and Securities (India) in a report on 23 August. In this backdrop, while the scope for further re-rating appears slim, steady performance in the coming quarters would ensure that at the very least, valuations sustain.