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Colgate: Robust volumes drive revenues - Views on News from Equitymaster
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Colgate: Robust volumes drive revenues
Jan 29, 2015

Colgate-Palmolive (India) Limited has announced its third quarter results for financial year 2014-15 (3QFY15) results. The company has reported a 11.8% YoY increase in sales and 16% YoY increase in net profits. Here is our analysis of the results.

Performance summary
  • The company recorded a 11.8% YoY growth in topline in 3QFY15 on a 5% growth in offtake of toothpastes. For 9mFY15, revenues increased by 11.4% YoY.
  • The operating margin expanded by 2.6% YoY in 3QFY15 and 2% YoY during 9mFY15.
  • At the net level, margin expanded by a mere 0.5% YoY due to high depreciation and tax charges. For 9MFY15, the net margin contracted by 2%.

Standalone financial snapshot
(Rs m) 3QFY14 3QFY15 change 9mFY14 9mFY15 change
Total Revenue 8,911 9,960 11.8% 26,515 29,534 11.4%
Expenditure 7,406 8,014 8.2% 21,894 23,787 8.6%
Operating profit (EBDITA) 1,505 1,946 29.3% 4,621 5,748 24.4%
EBDITA margin (%) 16.9% 19.5% 2.6% 17.4% 19.5% 2.0%
Other income 162 97 -40.5% 464 260 -43.9%
Interest - -   - -  
Depreciation 121 203 68.3% 355 546 53.9%
Profit before tax 1,547 1,840 18.9% 4,731 5,462 15.5%
Extraordinary item (1) -   705    
Tax 418 531 27.1% 1,360 1,509 10.9%
Profit after tax/(loss) 1,128 1,309 16.0% 4,076 3,954 -3.0%
Net profit margin (%) 12.7% 13.1% 0.5% 15.4% 13.4% -2.0%
No. of shares (m)         136  
Diluted earnings per share (Rs)*          38.8  
Price to earnings ratio (x)*          49.0  
* Trailing 12-month earnings

What has driven performance in 3QFY15?
  • Colgate clocked a 11.8% YoY revenue growth led by 5% YoY volume growth in toothpastes. The company continued to strengthen its leadership position in the toothpastes, growing its volume market share by 80 basis points YoY to 56.7% for the period January-December 2014. In the toothbrush category, its volume market share rose by 80 basis points YoY to 42.4% during the period January-December 2014.

    As a % of net sales
    3QFY14 3QFY15 Change in basis points
    Cost of goods 38.80% 36.52% -228.12
    Staff costs 5.9% 6.6% 69.55
    Advertisement 20.5% 17.9% -256.64
    Other expenditure 17.9% 19.4% 150.66

  • The operating profit margin improved by 2.6% backed by lower raw material to sales ratio and a 2% cut in ad-spends. As a proportion of sales, the raw material costs fell by 2.3% whereas ad-spends were lower by 2.6% during the quarter. These savings were partially offset by a 1.5 % increase in other expense to sales ratio.

  • Operating leverage was partially neutralized by a 68% jump in depreciation charges. Even the tax incidence rose to 29% in 3QFY15 from 27% in 3QFY14.

  • The net margin expanded by a mere 0.8% during the quarter due to a 52% jump in depreciation outgo. Even the other income earned during the quarter was lower by 41%. The tax incidence has risen to 27% in 2QFY15 from 26% in 2QFY14.
What to expect?
Colgate has been witnessing robust volume growth. Even its operating margin has been positively impacted by easing input costs and lower ad-spends. Backed by strong brand equity and focus on innovative and premium offerings, its growth prospects remain bright.

At a price of Rs 1,903, the stock is trading at 38 times its FY17 earnings. We had given a BUY at lower level on this stock. At current valuations, the stock is overvalued and we would recommend that subscribers do not buy the stock at current high levels.

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