Colgate is making the right moves, though valuations offer little cheer
Source: Live Mint
Colgate Palmolive (India) Ltd has had a good run in recent quarters and continues to make efforts to boost growth.
At its analysts meeting on Wednesday, the management, among other things, highlighted an interesting development under its ‘oral health movement’ initiative. The oral care company has launched universally accessible AI-based dental screenings. Here, a consumer needs to scan QR codes available on over 800 million packs and upload three pictures, following which an AI dental screening report will be released through WhatsApp.
The consumer can then opt for a free dental consultation through 50,000 dentists at pin codes that cover 80%+ of the urban population. The company is also facilitating AI dental screenings at over 500 on-ground locations. Colgate hopes this would help increase awareness about oral health and drive category consumption eventually.
There is potential for growth. For perspective, about 55% of rural households do not brush daily and only 20% of urban households brush twice a day, leaving headroom for growth in the toothpaste category. As such, leading toothpaste category growth is a key strategic pillar for Colgate.
Also Read: On a mission to change consumer behaviour, grow premium offerings: Colgate-Palmolive’s Prabha Narasimhan
Other pillars of growth include: premiumization backed by science-based innovative portfolio of products; lead category growth in toothbrushes and devices; and building a strong portfolio in personal care.
The management pointed out that the share of premium products in the oral care mix is currently lower than personal care categories. The company noted that Colgate Total is growing at 3X versus the toothpaste category. To improve accessibility, Colgate Total’s entry price has been lowered. Distribution has grown to 300,000 stores from 30,000.
To be sure, the slowdown in urban demand is a near-term worry even as rural is faring better. In the September quarter, urban toothpaste category volume growth was markedly slower than rural. Nevertheless, for the past three quarters, Colgate’s domestic net sales growth was in double digits. During FY24 and the half year ending September (H1FY25), Colgate’s topline growth was 1.6x and 2.4x the average FMCG industry growth. Here, the sector average includes top 12 listed FMCG companies in India.
“Historically, Colgate’s volume growth has lagged behind that of its peers. Hence, tracking its volume performance in the upcoming quarters is important, especially given the current softness in urban demand,” said analysts from Motilal Oswal Financial Services in a report on 27 November.
Moreover, Colgate’s margins are expected to moderate going ahead. Gross and Ebitda margin in FY24 stood at 69.7% and 33.5%, respectively. Ebitda is earnings before interest, tax, depreciation and amortization.
Amid this, the stock’s pricey valuation is another sore spot even though the shares are down almost 25% from their 52-week highs of ₹3,890 apiece seen on 30 September.
Nomura Global Markets Research has marginally cut FY25-27 forecasted earnings per share (EPS) to factor in lower operating profit margin. It values Colgate at a price-to-earnings multiple of 49 times twelve-month ending September 2026 estimated EPS to arrive at a target price of ₹3,000 with a 9% EPS compound annual growth rate over FY25-27.
Colgate’s shares are now trading around ₹2,900 apiece. Nomura has maintained its ‘reduce’ rating on the stock citing unfavourabe risk-reward.
Also Read: FMCG stocks have disappointed. Can the big 4 pull off a turnaround?
