Improvement in volume growth trajectory key for reversal in Colgate’s fortunes

Banking on relaunches, foray into new segments, digital strategy to address issues

Colgate-palmolive (India), the country’s largest oral care company, continued to underperform on the growth front. Though its operational performance was better than expected in the March quarter (Q4), the firm saw tepid growth on the revenue front.

Overall sales grew 1.1 per cent year-on-year (YOY), weighed down by the 3 per cent decline in toothpaste volumes because of the moderation in the oral care category. The volume decline was offset by price/mix-led value growth of 4 per cent. While value growth in the toothpaste segment was positive, it was weak in the toothbrush segment, as consumers delayed purchases because of the slowdown.

Brokerages indicate that the firm continues to trail rivals on volume growth. Analysts, led by Anand Shah of Axis Capital, say that growth has been consistently lower than Dabur’s oral care (toothpaste) segment’s performance, while highlighting the company’s contention that it is holding on to market share. The management also mentioned that growth in the naturals/ayurvedic segment was beginning to wane.

In addition to macro (rural growth) and category slowdown concerns, Colgate’s focus on new categories has not paid off so far. Analysts at ICICI Securities point out the lack of traction for revenue, despite the enhanced focus on several new categories last year such as mouth spray, oil pulling (mouthwash), toothpaste for diabetics, expansion of Naturals toothbrush portfolio, and Gum Expert.

The company’s large core brands — Strong Teeth, Active Salt, and Vedshakti — are being relaunched with improved formulations and stepped-up marketing initiatives. The Strong Teeth brand has been registering doubledigit growth since relaunch in 2019, according to Nomura Research. The company has also expanded the Palmolive brand in the face cleansing category.

Though the top line performance was weak, the company’s margins beat estimates. While its gross margins contracted 85 basis points (bps) YOY to 66.8 per cent (estimates were for 100 bps lower), operating profit margins were flat at 33 per cent (estimates of under 30 per cent) due to lower staff costs, advertising spends, and other expenses.

In the near term, the Street will focus on volume growth trends and the impact of the new initiatives (relaunch, marketing) before the new chief executive officer takes over in September. The uncertainty could delay any immediate upside for the stock. Say analysts at Motilal Oswal Research, “While we await response of the relaunches/new launches and strategy under the new CEO, the core issue of lack of sales growth (caused by high category penetration/no signs of regaining lost market share), will continue to delay rerating of the stock.” Further, there is little sign of a shift from the dependence on oral care.

The stock has gained 16 per cent from its lows in March. At the current price, it is trading at over 36 times its FY24 earnings estimates, which is on the higher side, according to analysts.