On first glance Colgate's results seem stunning. The company has declared a significant 30% net profit growth in the December quarter. It has achieved this as a result of lower expenditure, thereby improving operating margins by a sizeable 260 basis points to 9.3%.
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However, the company's topline has actually declined by over 2% indicating a tough market environment. Colgate has managed to grow its bottomline by controlling its advertisement expenses. Its advertisement cost declined by 12% YoY to Rs 569 m. Its ad expenses stood at 19.3% of sales, lower than 21.5% of sales witnessed in December quarter last year.
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It is not that Colgate reduced its promotional efforts, it seems more like an effect of declining ad rates. Another reason could be that its arch rival, Hindustan Lever's, media noise has reduced, thereby helping Colgate in reducing its own ad expenditure (Colgate's ad spend to sales ratio was the highest in the FMCG sector at 23% during 2QFY02).
Though Colgate has done well to reduce its ad spend, whether it is able to continously do so remains to be seen. As per August 2001 edition of A&M, Colgate's market share of the 90,000 tonne Indian toothpaste market stood at 50.9%, while HLL's share stood at 32.9%. However, at HLL's analyst meet yesterday, the company said that its market share stood at 36.3% of the oral care market in November 2001. This indicates that HLL has gnawed some share of Colgate's pie again. This is worrying and could hinder Colgate's plans to keep a check on its ad expenses going foward.
At the current price of Rs 155 the stock trades at a P/E of 33x annualised 9m FY02 earnings. Its market cap to sales ratio stands at 1.8x.
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