Colgate Palmolive shares buy or sell? Falls 3% in two days, analysts see upside as margins improve

Colgate Palmolive share price continued to drop on Thursday, even though the company reported a 12.3% on-year jump in net profits to Rs 274 crore. Colgate Palmolive registered a 7% jump in domestic sales during the July-September period when compared to the last year. The personal care product manufacturer is believed to have had little impact of the coronavirus induced lockdown with operations resuming after April, which has helped the company recoup losses from the first quarter. The key highlight of the financial performance of Colgate-Palmolive was the 320 basis points growth in gross margins and 540 basis point growth in EBITDA. Shares were down 0.60% at Rs 1,425 per share.

Net sales during the period stood at Rs 1,277 crore, an increase of 5.3% over the same period last year. Key innovations in the second quarter include products such as Visible White Instant toothpaste, Colgate Gentle toothbrushes, Zig-Zag anti-bacterial, and Vedshakti mouth spray, said Yes Securities. Management of Colgate Palmolive said that their strong supply chain has helped recovery. “Stock is trading at 35x FY23 earnings,” said analysts at Yes Securities.

The strong margin improvement was aided by a sharp decline in crude based commodity prices. “Cost cutting measures resulted in overhead spends down by 120 bps to sales. All these factors resulted in operating margin expansion of 540 bps to 31.8%,” said ICICI Direct in a note. Colgate Palmolive has witnessed a shrinking market share owing to growing use of Ayurveda & Natural brands. However, with the launch of new products every quarter the company has now managed to stem the loss in the last four quarters. ICICI Directs expects volume growth of 7% to 4% in financial year 2022 and 2023.

Oral care segment, the primary focus of the company, offers less uncertainty at the current juncture, said brokerage firm Motilal Oswal. “Valuations are moderate at 38x FY22E EPS, close to its 10-year average. There is a spark of an incipient market share recovery under the new Managing Director. We arrive at a TP of Rs 1,720 per share,” it said while giving a ‘Buy’ call. Analysts at Kotak Securities have increased margin assumptions for the next two financial years by 4-9%. “Our DCF-based Fair Value is revised upwards to Rs1,600/share (Rs1,550 earlier). Market share revival expectation and reasonable valuations (38X FY2022E EPS) keep us positive on the stock; maintain ADD,” the said.

Further the company also announced an interim dividend of Rs 18 per share along with the results. The record date for the dividend has been set as November 2.