Sluggish volumes likely to cap upsides in Colgate-Palmolive stock

The Colgate-Palmolive (India) stock gained 2.3 per cent in trade on Friday, and ended at Rs 2,079 per share.

This was on the back of a robust operating performance in the July-September quarter of 2023-24 (Q2FY24) and expectations of gradual sales recovery going ahead.

While the stock is up 44 per cent from its lows in January this year, further gains will depend on its ability to sustain higher growth rates.

Most brokerages are cautious on the stock given the run-up in the stock prices and don’t see immediate upsides.

Operating performance stood out in the September quarter and was buoyed by pricing actions and lower costs.

Gross profit margins expanded by 502 basis points to 68.8 per cent.

Even as advertising spends saw a sharp uptick, the company managed to improve its operating profit margins by 337 basis points by 32.8 per cent.

Advertising costs as a percentage of sales expanded by 260 basis points to 13.7 per cent.

On the sales front, the company reported a growth of 6.6 per cent aided by volume gains of 3 per cent, while the rest was on account of pricing and better mix.

The sales growth was led by the toothpaste segment, which reported high single-digit growth.

Toothpaste volumes, however, were flat year-on-year (Y-o-Y).

In the June quarter, the company reported double-digit sales growth.

Say analysts led by Richard Liu of JM Financial Research, “We had highlighted last quarter that the higher-than-trend June quarter growth was also partly due to base-effect and not entirely due to improved momentum alone.

“September quarter earnings played to that script, with domestic toothpaste volumes likely down again by a tad vs high single-digit growth seen last quarter.”

Given that the Q1FY24 momentum has not sustained, the brokerage expects the stock to reverse some of the gains seen in recent times (up 29 per cent in the last six months).

The brokerage has a ‘hold’ rating with a target price of Rs 2,020.

Growth in Q2 was entirely driven by pricing action with the company hiking prices across its product range.

Emkay Research also highlights that after the mid-single-digit volume growth in Q1FY24 (on a low base and buoyed by planned product relaunches), the company is likely to have seen flat volume growth for Q2FY24.

The compounded annual growth rate for the last four years is just 1 per cent, it adds.

While price hikes could lead to top line growth, the brokerage believes that steady price actions will invite competition, which will have a bearing on market share and structural growth.

The brokerage has retained its sell rating with a target price of Rs 2,034.

For the current financial year (FY24), resilient urban demand, low base and benign inputs will lead to strong growth.

However, sustaining double digit net profit growth beyond FY24 looks challenging but for a significant pick up in rural demand, says Prabhudas Lilladher Research.

The brokerage has a ‘hold’ rating with a target price of Rs 1,948, and believes that re-rating potential seems capped post the recent run up in the stock price.

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