Colgate valuations rise after top Q1 results

Ahead of its June quarter (Q1FY25) earnings, expectations for Colgate-Palmolive (India) Ltd. were fairly reserved. For the company’s toothpaste business, most analysts had been forecasting volume growth of 2-3% in the last quarter. However, Colgate beat those estimates by a wide margin and said its toothpaste segment saw high single-digit volume growth. Investors cheered, sending the stock up more than 5% on Tuesday, also hitting a new 52-week high ₹3424.95 per unit.

Colgate’s first-quarter total operating income increased 13% year over year ₹1,497 crore. In comparison, Hindustan Unilever Ltd.’s oral care segment grew by mid-single digits, driven by pricing. Colgate said demand growth in rural markets outpaced growth in urban markets for the second consecutive quarter. This, along with strong overall performance in toothpaste, toothbrushes and personal care, meant Colgate’s domestic revenue grew by 12.8% in the last quarter. The toothbrush portfolio saw strong double-digit revenue growth.

What’s even better is that EBITDA growth in Q1 was relatively faster, at 21.5% year-on-year. ₹508 crore, helped by margin expansion of 238 basis points (bps) to 34%. This was despite a 17% rise in staff costs, which was helped by a slower pace of growth in raw material costs and other expenses. The strong performance across the board prompted analysts to raise their profit estimates for this year and next.

Colgate’s efforts in category development and product innovation appear to be paying off. In fiscal 2024, Colgate’s EBITDA margin increased 386 bps year-over-year to 33.5%, leading to 23% EBITDA growth. However, the road ahead is difficult. Margin expansion may be limited.

“While premiumization will continue and will support margin improvement, we expect its contribution to be limited. We believe that if there are further price hikes, higher than competitors, it could lead to a loss of market share,” says Mihir P. Shah, an analyst at Nomura Financial Advisory and Securities (India). Hence, Colgate may not choose to use price hikes as a margin driver, as it did in fiscal 2024, according to Shah.

As the impact of earlier price hikes fades away, revenue growth could slow down. In FY24, revenue grew by 8.7%. “The dilemma of prioritizing growth versus maintaining margins will persist and to accelerate growth, margins may tighten,” points out Motilal Oswal Financial Services. FY25 will be a testing period for Colgate in terms of margin trajectory and volume expansion, the brokerage added.

Against this backdrop, Colgate’s high stock valuation is not comforting. After rising nearly 66% over the past year, the stock is trading at nearly 57 times fiscal 2026 earnings estimates, based on Bloomberg consensus estimates.