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Colgate: Costs weigh on bottom line

Jan 31, 2011

Colgate-Palmolive (India) Limited has announced its 3QFY11 results. The company has reported a 12.9% YoY gain in sales and 43% YoY fall in net profits. Here is our analysis of the results.

Performance summary
  • Sales for Colgate grew by 12.9% YoY during the quarter.
  • Operating (EBITDA) margins for the quarter fell by 7.6% to stand at 16.1% on the back of increase in staff costs, higher advertisement spending and increase in other expenditure.
  • Net profit fell by 43% YoY during the quarter. This fall has been due to lower operating income, higher interest expense and sharp increase in effective tax rate.
  • For 9mFY11 net profit fell by 6.6% YoY while net profit margins fell by 3.6% to stand at 17%. This performance was due to lower operating income, higher interest costs and sharp increase in effective tax rate.

Standalone financial snapshot
(Rs m) 3QFY10 3QFY11 change 9mFY10 9mFY11 change
Net sales 5,110 5,766 12.9% 14,992 16,956 13.1%
Expenditure 3,898 4,836 24.1% 11,449 13,130 14.7%
Operating profit (EBDITA) 1,212 931 -23.2% 3,544 3,826 8.0%
EBDITA margin (%) 23.7% 16.1%   23.6% 22.6%  
Other income 74 92 24.2% 226 227 0.6%
Interest 5 19 265.4% 11 29 159.1%
Depreciation 56 91 63.3% 170 255 50.0%
Profit before tax 1,225 913 -25.5% 3,589 3,771 5.1%
Extraordinary item - -   - -  
Tax 61 250 309.2% 500 885 77.0%
Profit after tax/(loss) 1,164 662 -43.1% 3,089 2,885 -6.6%
Net profit margin (%) 22.8% 11.5%   20.6% 17.0%  
No. of shares (m) 136 136 136 136
Diluted earnings per share (Rs)*         29.6  
Price to earnings ratio (x)*         27.7  
* Trailing 12-month earnings

What has driven performance in 3QFY11?
  • During the quarter, the company witnessed a volume growth of 12% YoY coming on the back of strong sales of 13% YoY in the toothpaste category. The category increased its volume market share to 53.4% from 52.3% during the same quarter the previous year. Contribution from flagship brands like Colgate Dental Cream, Colgate Sensitive, Active Salt, Max Fresh and Colgate Total contributed to the increase in market share. Toothbrush category also saw strong sales with a volume growth of over 24%, with increase in market share from 39.7% in 3QFY10 to 40.9% in the current quarter. However, toothpowder continued to lag category growth, losing market share. Market share of toothpowder fell marginally to 47.3%. New category of mouthwash grew sharply. Market share of Plax mouthwash increased from 6.6% at the end of December 2009 to 17.3% at the end of December 2010. Low penetration level, strong investments in its brands and focus on its core business has continued to benefit Colgate and this is clearly visible from the strong volume growth and increase in market share in toothpaste and toothbrush category.

    Cost break-up
    As a % of net sales 3QFY10 3QFY11 9mFY10 9mFY11
    Cost of material 41.1% 37.5% 41.5% 37.3%
    Staff costs 7.9% 9.1% 7.8% 8.8%
    Advertisement 14.7% 20.9% 14.4% 15.9%
    Other expenditure 12.5% 16.4% 12.6% 15.4%

  • Operating income fell by 23.2% YoY. The main reason was increase in staff costs, advertisement cost and other expenditure. Staff costs increased by 29% YoY while advertisement costs and other expenditure increased by 60% YoY and 48% YoY respectively. However, cost of material did not grow in line with sales. This helped prevent further fall in operating income.

  • Bottom line fell by 43% YoY during the quarter as a result of fall in operating income and increase in effective tax rates as the company exhausted some of its tax saving benefits.

What we expect?
At a price of Rs 825, the stock is trading at 23 times our estimated FY13 earnings (RPro subscribers can click here). Colgate’s investment in brand building and its costs saving drive is paying off as seen from a strong volume growth and operating income growing faster than sales. We believe that the company with its dominant position in Indian oral care markets is well poised to capture industry growth. However, with new entrants on the horizon, competition is set to intensify and this may affect the company margins going forward. For these reasons we believe that growth from a 2 - 3 year horizon is already priced in the stock.

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