Colgate-Palmolive: weaker-than-expected recovery in wholesale trade


Colgate-Palmolive (India) Ltd’s September quarter results came as a negative surprise to investors who were expecting to see the post-goods and services tax (GST) implementation recovery in the results. The stock lost 2.6% on Monday after the company reported a 0.9% drop in sales volume.

Of course the drop in volume is not as much as the 3-5% decline in the previous two quarters. Also a 3% revenue growth on the back of a volume decline reflects a better product mix. Operating profit increased 9%, better than analysts’ estimates.

But as can be seen from the drop in the Colgate-Palmolive share price post the results announcement, this brought no cheer to investors. Their concerns emanate from three fronts. One is the loss in market share. Market share in toothpaste category in January-August this year stood at 54%, compared to 55.7% in January-September last year, indicating strong competition.

The second is the drop in volume. Volume fell despite lower retail prices due to reduction in tax rates. The third and the most important factor is weaker-than-expected recovery in the supply chain. Post-GST, restocking was expected to drive volume in the last quarter.

For instance, Bajaj Corp Ltd, which recently announced its results, reported decent growth in volume (up 5%). Further, channel checks by analysts showed restocking-led volume recovery in August and September. Though some saw slower recovery in the central and eastern regions of the country, most were expecting the situation to normalize by the end of this calender year.

But commentary from Colgate-Palmolive indicates a prolonged recovery. In a statement, the management said it sees a “gradual recovery” and continued improvement in the coming quarters. The commentary validates some analysts’ fears that restocking is happening at a slower-than-expected pace at the company.

Antique Stock Broking Ltd’s interactions with industry participants indicate that inventory outstanding days in the trade channel saw a reduction of 8-10 days compared to pre-GST levels. Interactions by Kotak Institutional Equities research found that only 70-75% of the wholesalers have come back into the system post-GST.

And many of those who have come back are yet to begin sharing their GST network number with distributors due to the fear of scrutiny (concerns over disclosing the full scale of operations) and other reasons, the broking firm said in a note.

Another analyst says the supply chain is seeing a consolidation due to change in tax laws and companies are looking to expand their direct presence. The net impact of all this is low product offtake and a prolonged recovery process. That said, the key, the analyst cited above says, is demand. While demand is said to be picking up in urban areas, one will get a better perspective when Colgate-Palmolive’s larger peer Hindustan Unilever Ltd releases its earnings.