Colgate-Palmolive India: Book profits :: Business Line

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Piggybacking on the market’s fondness for consumer stocks, Colgate-Palmolive India (Colgate) has sprinted 25 per cent in the year to date.

At Rs 1,238, the stock is valued at 36 times trailing earnings, placing it at the higher end of the valuation spectrum of FMCG stocks. Given the run-up in stock prices, the FMCG space could also lose attention as markets look to other growth sectors in the light of recent reforms.

The company holds over half the toothpaste market on strong pricing power. Sales and net profit have clocked steady growth. Colgate also has a strong standing in toothbrushes and the nascent mouthwash segment. With the urban market almost fully penetrated, the company is building on its rural presence to push sales.

However, gains on these fronts appear to be fully priced into the stock. Further, growth in volumes is beginning to taper off. The company has also ceded market share in the lucrative toothbrush segment to competition. In premium toothpastes, too, which Colgate is now driving, competition is growing.

On these counts, investors in Colgate can book profits in their holdings. With a more limited product profile, Colgate also lacks avenues to boost sales growth, unlike peers such as Dabur India or Hindustan Unilever.

PREMIUM PUSH

Revenues have grown at an annual 17 per cent over the past three years, while net profit grew 16 per cent.

However, growth in underlying volumes has moderated from an average 13 per cent in the earlier quarters to 11 per cent in the June 2012 quarter.

Colgate is pushing its premium toothpaste brands such as Colgate Sensitive.

However, in the near term, an increased premium presence is unlikely to improve operating margins, given the promotional spends needed to push these brands.

Colgate forked out 11 per cent of sales in adspends in the June quarter against the 9 per cent in the March and December quarters. Operating margins have remained in the 23-25 per cent band over the past three years.

MARKET SHARE

The premium category is also seeing competition from HUL’s Pepsodent range. Further, an entry by P&G is a distinct possibility in the longer term.

Colgate has already conceded market share to players such as P&G’s Oral B in toothbrushes; Colgate’s share in the segment has dropped around three percentage points over the past two years to 38 per cent now.

In mouthwashes too, Colgate’s market share has hovered around 26 per cent for the past few quarters, after its initial rapid growth.

The company is not actively pushing its Palmolive body-wash portfolio, also an intensely competitive segment.