Colgate’s margins shine, but volume concerns can’t be brushed away

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₹468 crore. This comes at a time when Colgate’s total operating revenue rose by 8% to nearly ₹1,396 crore. Even so, shares of Colgate dropped by more than 4% on Tuesday amid weak broader markets.

The margin shine was dimmed by a dull outlook for volume. Revenue growth was driven by price hikes and not volume growth, which is typically more appreciated. Analysts estimate Colgate’s volume to have marginally fallen year-on-year or have grown slightly.

The company said its toothpaste segment achieved double-digit growth and also saw volume growth. However, growth in the toothbrush segment and exports has disappointed. Still, everything put together, Colgate has outperformed in growth versus Hindustan Unilever Ltd’s oral care portfolio, which saw mid-single digit growth in Q3 led by Closeup.

Be that as it may, the challenge for Colgate really is that the outlook on meaningful volume growth ahead is weak despite many product innovations. Factors such as high penetration, intensifying competition and lower frequency of product usage in the oral care category pose a hurdle for volume growth. Also, there is limited room for further price increases without impacting volume.

“We see an overarching focus on pricing (especially at the premium end, and in the case of variants where competition is weak) and margins that could weigh on volume growth and premiumization in the medium term," Kotak Institutional Equities said in a report on 23 January. The analysts note that Colgate has used the inflationary cycle to push disproportionate price increases (even as raw material prices have eased) and expand gross margin by 450-500 bps to about 70%+ (industry leading). Of course, this means the earnings growth prospects are bright in FY24.