Colgate’s prospects look up, but don’t rush to buy

ET Intelligence Group: For decades, oral care in India has been synonymous with Colgate-Palmolive products. Over the past few years, that changed, with the undisputed leader losing share to makers of herbal toothpastes. This quarter marks the first in the last eight in which the slide has stopped, but investors should wait before queuing up to buy Colgate.

To be sure, it is still not certain whether Colgate has managed to stabilise its share in a competitive market. Furthermore, higher input costs and ad spends may keep the margins under pressure.

For the first time in two years, Colgate saw its toothpaste market share stabilize after the pan-India launch of the ‘natural’ tooth paste ‘Swarna Vedshakti’. Analysts expect Colgate to sustain its market share in the core category and gain share in the ‘natural’ category where Patanjali and Dabur own 80 per cent of the market.


In the September quarter, Colgate’s market share in toothpastes fell 150 basis points on year to 52.5 per cent but remained flat on a sequential basis. Can this trend sustain? In the past (June quarter of FY17), the company had seen a rebound in market share, but then the loss continued in the following several quarters.

While tooth paste accounts for about 80 per cent of the company’s revenues, the remaining largely comes from the toothbrush category in which it continues to lose market share — 44 per cent from 47 per cent two years ago. Although the September numbers were ahead of expectations – volume and sales growth came in at 7 per cent and 8 per cent against expectations of 5 per cent and 8 per cent — investors should wait for one more quarter.

Besides new launches, sales were also driven by a 17 per cent on-year increase in average selling price, although on a low base — negative 7 per cent in the last September quarter. EBIDTA margins at 28.2 per cent marginally expanded, mainly due to lower staff cost – down 7 per cent.

To be sure, subsequent quarters would also factor in the higher base effect, as growth began climbing from the December quarter of FY18.

Street estimates have increased – near 10 per cent sales and earnings growths against 5 per cent sales and 10 per cent earnings growth for the last two years. They believe the Patanjali euphoria is waning and the largest oral care company will benefit from this. Valuations remain reasonable but not that attractive. At the current price, Colgate is trading at 41 times trailing 12-month earnings against its last five-year average PE multiple of 44 times.