BackColgate-Palmolive’s brush with low volume growth
Given its past track record, investors may wait a quarter or two to see if the June quarter was merely an aberration
Premium
For Colgate-Palmolive (India) Ltd, 2014-15 has started on a dull note, with sales in volume terms growing by only 5% in the June quarter. Edelweiss estimates the company’s flagship toothpaste business’ volume growth to have been 4%. This is much lower than the 11% growth in the year-ago quarter or even the 7% growth in the March quarter.
The oral care market declined in the June quarter, according to Edelweiss, falling by 4% in volume terms. The slowdown in the packaged consumer goods market, visible in both urban and rural areas though more prominent in the former, appears to be catching up with oral-care sales growth.
A reason the oral care market had done relatively well in 2013-14 was that companies were launching new products and spending heavily on advertising, promotions and expanding distribution reach. This was partly in response to competition, due to the scare caused by Procter and Gamble’s (P&G’s) impending launch of a toothpaste brand. That launch happened but on a much smaller scale than everyone expected. But the market saw higher levels of spending.
Even in the June quarter, while Colgate’s sales grew 12.6% to ₹ 950.6 crore, its advertising and sales promotion (ASP) costs rose 15.9%. Despite sustaining marketing spends, the decline in the market seems to have hit growth. There could be another reason for slower volume growth, too—the cumulative effect of price increases and a focus on premium products.
Colgate’s material costs rose 8.8%, much lower than sales growth, and it said it has taken prudent price hikes and is trying to drive up the share of premium products in its sales. In Colgate’s case, though, profitability has risen compared with the year ago period, but it has declined sequentially. Operating profit has risen 17.2% over a year ago, but lower other income and higher depreciation restricted the increase in net profit to 7.6%. That’s not the kind of earnings growth shareholders are looking for in a stock that has risen 22.9% since end-May and trades at a price-to-earnings multiple of 40 times its 2014-15 consensus earnings estimate, according to Thomson Reuters. Given its past track record of volume growth, shareholders may be willing to wait a quarter or two to see if this quarter was merely an aberration.
Unlock a world of Benefits! From insightful newsletters to real-time stock tracking, breaking news and a personalized newsfeed – it's all here, just a click away! Login Now!
