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Colgate: Mixed results! - Views on News from Equitymaster
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Colgate: Mixed results!
Jan 22, 2007

Performance summary
Oral care major, Colgate, has announced mixed results for the third quarter and nine-months ended December 2006. For 3QFY07, while revenues have grown by 12.8% YoY, net profits have clocked a 20.6% YoY growth largely buoyed by a considerable jump in other income. However, the operating margins fell by 810 basis points due to higher operating expenses.

Financial picture
(Rs m) 3QFY06 3QFY07 (%) Change 9mFY06 9mFY07 (%) Change
Net sales 2,857 3,223 12.8% 8,221 9,519 15.8%
Expenditure 2,143 2,679 25.0% 6,815 7,966 16.9%
Operating profit (EBDITA) 714 544 -23.7% 1,406 1,553 10.5%
EBDITA margin (%) 25.0% 16.9%   17.1% 16.3%  
Other income 49 166 239.6% 286 496 73.6%
Interest 1 3 190.0% 4 7 72.5%
Depreciation 212 44 -79.5% 277 117 -57.9%
Profit before tax 550 664 20.8% 1,411 1,926 36.5%
Extraordinary item - -   - (588)  
Tax 132 161 21.5% 405 243 -40.1%
Profit after tax/(loss) 417 503 20.6% 1,005 1,095 9.0%
Net profit margin (%) 14.6% 15.6%   12.2% 11.5%  
No. of shares (m) 136.0 225.8   136.0 136.0  
Diluted earnings per share (Rs)*         10.8  
Price to earnings ratio (x)         35.5  
* 12months trailing earnings

What is the company’s business?
The ‘Colgate’ brand is synonymous with oral care in India. The company has successfully created a strong brand image and awareness in the minds of consumers over the last fifty years. Colgate earns around 95% of its revenues from the oral care segment. The company leads the 90,000 TPA oral care market with nearly 50% share. The oral care market has a penetration of only around 49% in India. The company also has a small presence in the personal products category with brands such as Palmolive (soaps, shaving products) and Charmis (face cream). The company has discontinued the manufacture of toilet bar soaps (Palmolive) from 3QFY06, which it now imports through one of the subsidiaries of its parent.

What has driven performance in 3QFY07?
Volumes drive sales: Colgate’s topline clocked a 12.8% YoY growth during the quarter chiefly led by volume growth across its product categories. Volumes for the core category grew by 13% YoY during the quarter and 10% YoY for 9mFY07. The toothbrush category also continued its strong growth momentum with volumes registering a 15% YoY growth during 3QFY07. Toothpaste volumes registered a 4%YoY growth for the nine-month period. Besides this, recently, Colgate had hiked prices of toothpastes by about 4% across all brands, except Cibaca, that cater to the lower end of the market on the back of higher input costs. Going forward, the company has plans to increase its Baddi capacity by 25% and also to expand its market distribution network to capture more market share.

Cost break-up
Cost break-up 3QFY06 3QFY07 9mFY06 9mFY07
Total Cost of goods 40.7% 45.8% 45.2% 44.4%
Staff Cost 8.7% 9.4% 8.8% 9.1%
Advertising 14.4% 14.0% 16.8% 15.1%
Other Expenditure 11.3% 13.9% 12.2% 15.1%

Margin woes: Raw material costs (as percentage of sales) have increased by 510 basis points (5.1%) and this is the primary reason why the company’s operating margins have contracted by 810 basis points during the quarter. Further, rise in staff costs and the other expenditure too added pressure on the margins. Though the company did raise the price of its final products, the intensifying competition also makes it difficult for the company to pass on the complete hike in raw material costs to the end user.

Other income saves the day: The other income has increased by a sizeable 240% YoY and this has really helped lend some respectability to its bottomline numbers. Also, the low depreciation costs due to the closure of Sewri plant last quarter has aided the net profit growth. For the nine-month period, there was an extraordinary item to the tune of Rs 588 m in respect of the VRS scheme for its Sewri plant. If one excludes the impact of the same, the growth in net profit stands at 67.5% YoY.

What to expect?
At the current price of Rs 383, the stock is trading at a price to earnings multiple of 35.5 times its trailing 12-months earnings. In this quarter, despite raising prices of its products, Colgate has witnessed margin pressure, indicating the intense competitive scenario. However, on the topline front, the company is doing well due to strong volumes. Colgate is the market-leader in toothpastes with 47% share and with huge potential given the low per capita consumption in India, growth prospects look positive. Having said that, valuations remain a cause for concern.

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