Colgate-Palmolive’s Q3 conundrum: to smile at 32% Ebitda growth or frown at falling market share

Colgate-Palmolive (India) Ltd’s market share numbers should worry. In January-December 2017, its volume share in toothpastes fell by 1.7 percentage points over a year ago to 53.7%. For good measure, let’s look at how it has done in fiscal year 2018 too. In the September quarter, the company had said its January-August 2017 market share was 54%, implying it has done worse in the four months since then. It has lost share in toothbrushes too.

One big reason is strong local competition—with the main antagonist being yoga guru Baba Ramdev’s Patanjali Ayurved Ltd. Smaller ones such as Dabur India Ltd too are proving a pain, successfully riding the wave for herbal products triggered by Patanjali.

While this is the report from the market, Colgate’s financials give a different perspective. It said that volume growth rose by 12% over a year ago while value sales rose by 19% (adjusted for differences in accounting for sales under the goods and services tax). A year ago, demonetization had led to an 8.6% decline in sales, inflating growth in the quarter under review.

That raises the question of whether or how primary sales (what the company reports and represents sales to distribution channels) and secondary sales (retail sales) numbers are not tallying. If volumes rose by 12% during the December quarter but Colgate’s retail share still declined, one explanation could be that demonetization affected channel sales more than retail sales. The bounce in channel sales may simply be a low base effect.

Another reason could be competition eating into Colgate’s share. Dabur said its toothpaste sales rose by 26% in value terms and gained share.

Lastly, could the toothpaste market be growing ahead of Colgate’s retail sales growth, which is why its share is falling? The trend in the forthcoming quarters may yield some answers.

Colgate’s 19% sales growth indicates a decent contribution from price and mix. Rural sales growth has been a laggard, based on management commentary from consumer goods firms. That may partly explain a better mix and also why its gross margins grew ahead of sales growth. The company’s Ebitda (earnings before interest, tax, depreciation and amortization) rose by 32% over a year ago. Advertising rose sharply by 43.9% while other expenses were flat. Its net profit rose by 33.5% over a year ago. Much of this is a low base effect, as net profit declined by 14.6% in the year-ago quarter.

The financials are only one part of the story for the company’s investors. Their main concern has to be whether Colgate wins the toothpaste wars. Talking about the company’s natural offerings in India, its parent—the Colgate-Palmolive Co.—said in a call that it is doing well. That should offer some solace to investors. India was one of the markets apart from China that did well in Asia-Pacific for the parent. In 2018, global advertising spends will be higher as it aims to drive sales growth.

In India too higher advertising spends could continue as Colgate attempts to ramp-up sales growth of flagship and the relatively new natural products. Still, while its financials send a message that things are improving, its market share numbers don’t. Since the market is where the final passage of this story will be written, it’s back to wait and watch for Colgate’s investors. Its shares rose by 0.5% on Monday, on a day when the BSE FMCG index rose by 0.2%.livemint