Stock Review: Colgate-Palmolive

Boosted by healthy volumes in the toothpaste (14 per cent) and tooth brush (19 per cent) segments, Colgate ended the June quarter with net profit growth of 19 per cent. While the June quarter results matched the Street's estimates, the positive part is that Colgate has enhanced its leadership position in toothpaste business.

Additionally, operating profit margins also improved. The markets, perhaps, had a sense of the improvement in numbers, given that Colgate's stock has outperformed the broader indices by around 15 per cent in the last three months. Notably, the company's growth prospects remain good, which should help deliver good returns in the long run.

Gaining ground

In the June quarter, flagship toothpaste brands like Colgate Dental Cream, Active Salt and Cibaca continued do well, while newer products like Colgate Sensitive also chipped in, resulting in Colgate's market share (volume) increasing 160 basis points to 53.3 per cent (January-May 2010), compared to the year-ago period. Higher rural India spending and upgrading by customers (from toothpowder to toothpaste) should help Colgate churn higher growth rates.

In toothbrushes, too, the company's market share (volume) increased 320 basis points to 41.2 per cent in the same period. However, higher competition from players like Dabur in the toothpowder segment saw Colgate's market share (volume) dip, albeit marginally, by 60 basis points to 48.4 per cent.

Operationally, selective price increase (largely due to higher excise duty), lower input costs and the impact of the merger of subsidiaries helped operating margins improve to 26.3 per cent (up 380 basis points year-on-year) — its highest in more than 20 quarters.

Outlook

Colgate's presence across price points and categories should sustain volumes for the company, which is seeing a greater conversion of customers from toothpowder to toothpaste. However, after the tax holiday for its Baddi manufacturing plant ended, the company saw its tax rates increase 450 basis points to 22.3 per cent in the June quarter, which could have some impact on profitability.

Increasing competition from Hindustan Unilever spending heavily on promotions (Shah Rukh Khan has been roped in as a brand ambassador) and the probable entry of Procter & Gamble in the toothpaste segment are things to watch out for. Higher competition could also induce Colgate to increase its ad spends, that is around 13 per cent of sales currently.

Overall, Colgate's sales are expected to increase 15-17 per cent and net profits 13-15 per cent over FY10-12 with operating profit margins of 23-24 per cent during this period. While growth rates are expected to be healthy, the stock is currently trading at 24 times its estimated 2010-11 earnings and can be added on dips with a long-term perspective.