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Colgate: Other expenses squeeze margins
Jan 23, 2014

Colgate Palmolive Limited has announced its third quarter results for financial year 2013-2014 (3QFY14). The company has reported 16% YoY growth in sales and 1.6% YoY increase in net profits. Here is our analysis of the results.

Performance summary
  • The company posted a 13.7% topline growth for the December 2013 quarter. For 9mFY14, revenues increased by 13.7%
  • The operating margin contracted by 2.2% due to steep rise in other expenses. For 9mFY14, the operating margin reduced by 3.5%
  • Net profit grew by 1.6% backed by 38% jump in other income. For 9mFY14, net profit increased by 9% and was propped up by an exceptional income of Rs 704 m.

(Rs. m) 3QFY13 3QFY14 Change 9mFY13 9mFY14 Change
Total income 7,838 8,911 13.7% 23,323 26,515 13.7%
Expenditure 6,338 7,406 16.8% 18,441 21,894 18.7%
Operating profit (EBITDA) 1,499 1,505 0.4% 4,882 4,621 -5.3%
EBITDA margin (%) 19.1% 16.9% -2.2% 20.9% 17.4% -3.5%
Other income 117 162 38.3% 378 464 22.6%
Interest 0 0   0 0  
Depreciation 113 121 6.4% 324 355 9.3%
Profit before tax 1,504 1,547 2.9% 4,936 4,731 -4.2%
Extraordinary inc/(exp) 0 -1   0 704  
Tax 393 418 6.3% 1,200 1,360 13.4%
Profit after tax/(loss) 1,111 1,128 1.6% 3,736 4,075 9.1%
Net profit margin (%) 14.2% 12.7% -1.5% 16.0% 15.4%  
No. of shares (m)         136  
Diluted earnings per share (Rs)*         39.0  
Price to earnings ratio (x)         33.9  

What has driven performance in 3QFY14?
  • Colgate clocked a 13.7% growth in revenues led by 10% volume growth. The toothpaste segment recorded a growth of 11% during the quarter. The company further strengthened its leadership position in toothpastes by increasing its volume market share to 56% in CY13 from 54.5% last year. Robust growth in the company's brands such as Colgate Dental Cream, Active Salt, Max Fresh, Colgate Total and recently launched Visible White led to strong market gains. In the toothbrush segment, the company's volume market share increased to 41.5% in CY13 from 39.8% in the previous year.

    Cost break-up
    As a % of net sales 3QFY13 3QFY14 Change in basis points
    Cost of goods sold 38.8% 38.8% -4.44
    Staff costs 8.1% 5.9% -211.01
    Advertisement exp. 12.7% 13.6% 89.05
    Other expenditure 21.2% 24.7% 350.09

  • However, the strong topline growth failed to percolate at the net level due to a steep rise in other expenses that increased by 3.5% in proportion to sales. This together with a 0.9% increase in ad-spends to sales ratio more than offset the 2.1% savings in staff costs to sales ratio. Resultantly, the operating margin contracted by 2.2% during the quarter.

  • At the net level, the company managed to register a higher 1.6% growth in profits aided by 38% rise in other income as well as modest rise in depreciation and interest charges.
What to expect?
Despite slowdown in consumer discretionary spending as well as growing competition, Colgate has been fortifying its leadership position. However, its margins have been hit by a sharp rise in other expenses.

At a price of Rs 1,325, the stock is trading at 24 times our estimated FY16 earnings. We had given a BUY at lower level on this stock. At current valuations, the stock does not offer a comfortable margin of safety and we re-iterate a BUY at lower level on the stock.

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