Colgate-Palmolive’s Q2 disappoints; its investors have little to cheer

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Colgate-Palmolive (India) Ltd’s shares are about 15 percent lower from its 52-week high of Rs 1823.40 seen on July 26 on the National Stock Exchange (NSE). What’s more, September quarter results (Q2FY22) announced on July 25 offer no reason to cheer. The numbers are below some analysts’ expectations, with operating revenues increasing by 5 percent year-on-year (YoY) to Rs 1,352 crore. For perspective: Colgate’s revenue growth was in double-digits in the previous two quarters.

Gross profit margin contracted 130 basis points (bps) to 66.8 percent owing to input cost pressures. A relatively sharper rate of increase in advertising expenses weighed on the EBITDA (earnings before interest, tax, depreciation and amortisation) margin, which contracted 220bps to 29.6 percent. Further, employee costs as a percentage of revenues rose 20bps. The upshot: net profit for Q2 fell 1.8 percent to Rs 269 crore.

“It was another par for the course (disappointing) performance from Colgate India,” said analysts from ICICI Securities Ltd in a report on October 26, commenting on Q2 results. The broker added, “As a single category market leader is currently going through a phase of high category penetration, marginal presence in ayurveda, naturals segment (umbrella branding may be one of the reasons), likely impacted affordability (due to historical price-led growth), Indian consumers' reluctance to adopt twice-brushing a day, and 'operating margin + royalty' of about 35% makes us wonder whether it's a case of over-earning which is constricting category growth.”

One silver lining is that valuations of the Colgate stock are not too demanding. Currently, the stock trades at around 36 times the average financial year 2023’s earnings estimate of six brokers.

To be sure, it is not as if prospects are hunky-dory. Prabhudas Lilladher Pvt Ltd has cut its earnings per share (EPS) estimates by 6.4 percent/3.1 percent/3.5 percent for FY22/FY23/FY24 on the back of 1) increased input cost inflation and 2) low volume growth expected in 2H22 given large base in 4Q21, and 3) flattish EBITDA margins over FY21-24 post sharp 460bps gains in FY21.

In general, muted sales growth has been a big concern for Colgate’s investors. They await an improvement in market share, although the visibility on this is not particularly high at the moment. Against this backdrop, an increase in competitive intensity would be troublesome for Colgate.