Encouraging signs of demand recovery for Colgate Palmolive

Shares of Colgate Palmolive (India) Ltd have been fairly resilient during these pandemic times. The shares are about 11% away from its pre-covid high of 1,514.35 apiece seen on 24 January on NSE. The Colgate stock currently trades at about 38 times estimated earnings for financial year 2022, based on Bloomberg data.

The company’s presence in the oral care category means that the demand for its products is relatively stable during these pandemic times. What’s more, the September quarter is set to turn out better on a sequential basis. After an interaction with the Colgate management, analysts from Nomura Financial Advisory and Securities (India) Pvt. Ltd said in a report on 18 September, “Colgate’s toothpaste volumes have improved from the June quarter (-4% year-on-year) levels and are witnessing growth.” For the September quarter, the broking firm estimates Colgate’s toothpaste volumes in early mid-single digits and toothbrush volumes to be flat. Note that in the June quarter, toothbrush volumes had declined substantially, weighing on overall volume growth during the quarter. Toothbrush sales tend to be more discretionary than that of toothpaste.

Commenting on the trade channel, Nomura added, “Colgate expects sales to be further augmented by some trade channel filling that had reduced in the June quarter; however, channel inventory is still below pre-pandemic levels.” Although, it would be interesting to watch how operating margins shape up considering the advertising spends were curtailed in the June quarter (down 25% year-on-year).

In general, analysts also have a positive view on the growth focus of the new chief executive officer. For Colgate, there is potential for market share gains and that would be one of the triggers for the stock, going ahead. Even so, competitive intensity remains a concern on this front for Colgate.

Analysts from Centrum Broking Ltd wrote in their June quarter results review, “We remain cautious until we see lower competitive intensity and gain in market share in the naturals’ portfolio. Further, we expect rising competitive intensity in the multi-benefit segment from Hindustan Unilever Ltd (Sensodyne) and in naturals portfolio from Dabur/ Patanjali to lift Colgate’s spends as gaining market share is the top priority.”

Nonetheless, market share gains could well offer scope for Colgate’s valuations to expand hereon.

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