Colgate's Q4 margin surge came at a price

Focus on cost-efficiencies led to margin gains, but market share fell

Colgate-Palmolive India (Colgate), on Monday, reported a strong 32.4 per cent yearon-year jump in net profit for the March 2018 quarter (Q4), with net profit up 32.4 per cent. This was mainly owing to margin expansion. It has beaten Street expectations of 20-25 per cent growth in net profit.

With better cost efficiencies, Colgate experienced a 299-basis point (bps) year-onyear(y-o-y) gross margin expansion to 65.4 per cent, and over 400 bps in earnings before interest, tax, depreciation and amortisation (Ebitda) margin — both of which were ahead of analysts’ estimates.

Colgate’s raw material costs as a percentage of sales dropped to 34.6 of its net sales in Q4 from 37.5 in the year-ago quarter. Even its advertising spends came down in Q4. But, all this came at a price. Colgate lost market share for the seventh consecutive quarter, with its toothpaste market share declining 170 bps yo-y as of March 2018.

As indicated by the management, stiff competition in the natural segments (which grew by around 10 per cent) weighed on the overall market share. As a result, Colgate’s overall volume growth came in at just four per cent in Q4, versus estimates of over 5- 6 per cent growth, and against 12 per cent increase in the December 2017 quarter.

Also, its revenue at ~10.92 billion for Q4 came lower than Bloomberg consensus estimate For the period ending of ~11.07 billion. Investors clearly do not seem to be happy with Colgate's margin expansion, and instead are rightly worried about market share. The Colgate stock fell by five per cent in intra-day trade on Monday, before ending 1.3 per cent down at ~1,207.5.

Notably, this came at a time when peers such as Dabur and Hindustan Unilever gained market share in the premium toothpaste category, led by higher acceptance of naturals. Peers have also indicated that pressure on account of Patanjali is now behind.

Though the Colgate management said it aimed to expand the reach of its natural segment to recover market share and guided for 4-5 per cent volume growth (conservative according to analysts), analysts are sceptical about an immediate uptick in the firm's market share. Against this backdrop, and the rich valuation of over 40 times of FY19 estimated earnings, analysts foresee some correction in the stock.