What the Colgate stock needs for sharp upsides

While the plans to drive volume growth seem appealing, the absence of financial targets was a dampener. Also, there were no significant changes in the company’s strategies from earlier, analysts said. Perhaps, this led to some disappointment for investors, given the stock has fallen by nearly 5% in the past two trading sessions. The conference was held Tuesday during market hours.

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Oral care is a highly penetrated category. Therefore, volume growth can come through an increase in the frequency of brushing, and Colgate sees headroom for growth here. In rural areas, about 55% of households do not brush daily, and in urban areas, only around 20% of households brush twice a day. However, establishing such habits will not be an overnight task, cautioned Narasimhan. An efficient distribution strategy and constant communication with the consumer would gradually aid in this endeavour.

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Not just toothpaste, the management also sees potential to drive volumes in brushes. In urban areas, brushes are replaced once every six months, and in rural areas, once every 15 months. The general view is that brushes should be replaced every three months.

Besides volume, the company’s growth would also be steered by value growth. Colgate intends to use the lever of premiumization here. For perspective, 64% of the toothpaste market is in the price range of ₹91-110 per unit. This provides an opportunity for the company to premiumize by providing new and value-added benefits. Through its products, such as Colgate Visible White O2, it is making its mark in the oral beauty category. Another scope for premiumization is by catering to the kids’ category.

All said, it now boils down to execution. The company has been a laggard on this front, which has resulted in market share loss. “Recent premium innovations are tracking well, albeit they are still small contributors to overall revenue. The guardrails laid down by the new CEO are promising and have the potential to improve volume growth and market share for the company; however, we believe execution will be key,” said analysts at Nomura Financial Advisory and Securities (India) in a report on 14 December.

Meanwhile, Colgate aims to build its personal care business through the Palmolive brand and via inorganic opportunities. This vertical has high gross margins, but Ebitda margins are currently lower as a good chunk of investment is required to grow this category.

To be sure, strong competition from rivals such as Dabur India and Patanjali needs closer tracking. Colgate’s shares trade at almost 35 times the estimated earnings for FY24, based on Bloomberg data. Valuations are not too pricey compared to other consumer companies, but near-term re-rating triggers seem limited. The company’s overall volumes are estimated to have declined year-on-year in the past three quarters.

“Over the past five years, sales growth and earnings growth stood at an unimpressive 5% CAGR and about 10% CAGR, respectively. With weak revenue and earnings growth likely to sustain going forward, there is unlikely to be any re-rating of the stock,” said analysts in a Motilal Oswal Financial Services report dated 13 December.

Given this, consistent and significant volume growth is necessary for sharp upsides in the Colgate stock. This would depend on the successful execution of the company’s strategies.

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