Rising margins in the previous quarter has failed to impress brokerages tracking Colgate-Palmolive India Ltd. The country’s highest selling toothpaste and toothbrush brand saw its volumes drop in the first three months of the current financial year.
Colgate did manage to hold on to its ‘market leader’ position but its share contracted on a yearly basis, after dealers started de-stocking in June, before the goods and services tax was implemented. The contraction prompted brokerage houses to take a more cautious stance on the stock.
GST Transition Smooth, But Loopholes Remain
“Inadequate innovation” and a drop in market share prompted IDFC Securities to raise concerns over Colgate’s dominance in the market.
Colgate’s market share in the toothpaste category, shrank to 54.3 percent in the quarter ended June from 55.9 percent in the same period last year.
Similarly, volume market in the toothbrush category declined to 45 percent in April-June quarter, from 46.8 percent last year.
IDFC Securities maintained that the fast-moving consumer goods company has managed GST transition better than most peers.
Lack of competitive herbal portfolio and market share decline in the premium segment (Colgate Total & Sensitive) continues to drag overall market share for the company.IDFC Securities Report
The brokerage house said it has factored in a strong volume recovery for the fast-moving consumer goods (FMCG) major in the rest of financial year 2017-18, despite no significant jump in advertising spends. Infact marketing expenses declined 8 percent year-on-year in the quarter ended June.
Colgate will have to disproportionately invest in the medium term to defend its share in the oral care space, impacting its profitability further, added brokerage.
IDFC Securities reiterated its ‘Underperform’ rating on the stock with price target Rs 958.
The Least Preferred Stock
Morgan Stanley believes the FMCG major might lack sufficient brand equity to compete within the ayurvedic/herbal or natural category for long-term volume growth.
Despite the oral-care segment having strong long-term volume growth prospects in India, considering its under-penetration compared to other emerging markets, Colgate might lag behind, added the brokerage.
Morgan Stanley is concerned regarding Colgate’s gross margins, having peaked, expanding over 450 basis points in the last five years. The fact is little offbeat and some moderation in the same is likely, it added.
The brokerage maintained its 'Underweight' rating on the stock with Rs 830 as the price target.
Brand Equity Score Remains #1 For Colgate
UBS remained bullish on the stock and said that the distribution structure of the FMCG major is wholesale dependent but GST compliant, unlike the rest of its peers.
Colgate was the only toothpaste manufacturer to introduce price cut to the tune of 10 percent, as tax rates declined to 18 percent from 28 percent previously, said the brokerage. Other companies in the loop refrained from such a move due to differential tax on Ayurveda products, it added.
UBS reiterated its ‘Buy’ rating on the stock with price target Rs 1,250 in light of the following reasons:
- Proven ability to take on competition threat with its renewed execution aggression.
- New variant launches in herbal could assist in expanding volumes.
- Innovation pipeline looks promising for Colgate’s expansion plan.