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Colgate: Higher ad-spends curtail profits - Views on News from Equitymaster
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Colgate: Higher ad-spends curtail profits
Feb 1, 2013

Colgate-Palmolive (India) Limited has announced its second quarter results for financial year 2012-13 (3QFY13) results. The company has reported a 14% YoY increase in sales and 4% YoY fall in net profits. Here is our analysis of the results.

Performance summary
  • Colgate posted a 14% growth in turnover in 2QFY13. During 9mFY13, the topline increased by 17% on a 9% volume growth.
  • The operating margin contracted by 2.2% due to a steep rise in ad-spends. During 9mFY13, the company has been able to improve operating margin by 0.4% backed by controlled staff costs and other expenses.
  • Earnings fell by 4% on a slower rise in operating profit and reduction in other income. For 9mFY13, earnings grew by 18%.

Standalone financial performance
(Rs m) 3QFY12 3QFY13 change 9mFY12 9mFY13 change
Total Revenue 6,882 7,838 13.9% 19,903 23,323 17.2%
Expenditure 5,418 6,338 17.0% 15,816 18,441 16.6%
Operating profit (EBDITA) 1,464 1,499 2.4% 4,087 4,882 19.4%
EBDITA margin (%) 21.3% 19.1%   20.5% 20.9%  
Other income 124 117 -5.6% 376 378 0.7%
Interest 4 -   13 -  
Depreciation 99 113 14.1% 293 324 10.7%
Profit before tax 1,485 1,504 1.2% 4,156 4,936 18.8%
Extraordinary item - -   - -  
Tax 330 393 19.2% 999 1,200 20.1%
Profit after tax/(loss) 1,156 1,111 -3.9% 3,157 3,736 18.3%
Net profit margin (%) 16.8% 14.2%   15.9% 16.0%  
No. of shares (m)         136  
Diluted earnings per share (Rs)*         37.1  
Price to earnings ratio (x)*         36.5  
* Trailing 12-month earnings

What has driven performance in 3QFY13?
  • Colgate recorded a 14% increase in revenues. Its toothpaste volume market share increased to 54.2% from 52.4%. The toothbrush volume market share increased by 3.7% to 39.5%. In the mouthwash category, the company gained a volume market share of 26.7%.

    As a % of net sales 3QFY12 3QFY13 Change in basis points
    Cost of goods 38.52% 38.84% 32.04
    Staff costs 7.8% 8.1% 29.24
    Advertisement 10.0% 12.7% 272.18
    Other expenditure 22.4% 21.2% -119.31

  • The company's operating margin bore the brunt of a steep rise in advertisement expenditure. The ad-spends to sales ratio jumped up by 2.7% during the quarter that was partially offset by a 1.2% fall in the proportion of other expenses to sales. Prudent price increases enabled the company to limit the rise in the cost of goods sold. Colgate's overall operating margin reduced by 2.2% to 19% during the quarter.

  • A moderate 2.4% rise in operating profit led to a 4% fall in earnings on a 19% higher tax outgo coupled with lower other income earned for the quarter. The tax incidence during the quarter rose to 26% from 22% in the year-ago quarter.

What to expect?
At a price of Rs 1355, the stock is trading at 26 times our estimated FY15 earnings. We had given a SELL on this stock. At current valuations, the stock appears overpriced and we re-iterate a SELL on the stock.

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