Colgate Palmolive exhibits encouraging signs of revival

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Shares of Colgate Palmolive (India) Ltd have been fairly resilient during the pandemic. The shares are about 11% away from its pre-covid high of 1,514.35 apiece on 24 January on the NSE. The stock currently trades at about 38 times estimated earnings for FY22, according to Bloomberg data.

The company’s presence in the oral care category means that the demand for its products is relatively stable during covid times. And, the September quarter looks set to turn out better on a sequential basis.

After an interaction with the Colgate management, analysts from Nomura Financial Advisory and Securities (India) Pvt. Ltd said in a report on 18 September: “Colgate’s toothpaste volumes have improved from the June quarter (-4% year-on-year) levels and are witnessing growth.”

Teething troubles

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Teething troubles

For the September quarter, Nomura estimates Colgate’s toothpaste volumes in mid-single digits and toothbrush volumes to be flat. Note that in the June quarter, toothbrush volumes had declined substantially, weighing on overall volume growth. Toothbrush sales tend to be slightly discretionary in nature.

Commenting on the trade channel, Nomura said: “Colgate expects sales to be further augmented by some trade channel filling that had reduced in the June quarter; however, channel inventory is still below pre-pandemic levels.”

However, it will be interesting to watch how operating margins shape up, considering that ad spends were curtailed in the June quarter (down 25% year-on-year).

In general, analysts have a positive view on the growth focus of the new chief executive. Colgate has potential for market share gains and that will be a trigger for the stock, going ahead. Even so, competitive intensity remains a concern on this front for Colgate.

Centrum Broking Ltd analysts wrote in their June quarter results review: “We remain cautious until we see lower competitive intensity and gain in market share in the naturals’ portfolio. Further, we expect rising competitive intensity in the multi-benefit segment from Hindustan Unilever Ltd (Sensodyne) and in naturals portfolio from Dabur/ Patanjali to lift Colgate’s spends as gaining market share is the top priority.”

Nonetheless, there could well be scope for Colgate’s valuations to expand when the market share gains take place.

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