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Colgate: Cost savings pay off - Views on News from Equitymaster

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Colgate: Cost savings pay off
Feb 2, 2009

Performance summary
  • Topline grows by 13% YoY during 3QFY09. A strong volume growth of 14% in the toothpaste category leads to the double digit growth.
  • Operating margins during the quarter are higher by 0.6% YoY, while for 9mFY09, margins decline marginally by 0.4% YoY
  • Stable operating margins coupled with lower interest costs and lower tax outgo leads to the bottomline jump of 29% YoY for the quarter.


Financial snapshot
(Rs m) 3QFY08 3QFY09 % change 9mFY08 9mFY09 % change
Net sales 3,846 4,356 13.3% 11,291 12,986 15.0%
Expenditure 3,065 3,446 12.4% 9,033 10,448 15.7%
Operating profit (EBDITA) 781 909 16.4% 2,258 2,539 12.4%
EBDITA margin (%) 20.3% 20.9%   20.0% 19.5%  
Other income 59 65 11.1% 166 189 14.1%
Interest 2 1 -45.0% 11 10 -8.3%
Depreciation 51 55 9.5% 144 166 15.4%
Profit before tax 787 918 16.6% 2,269 2,552 12.5%
Extraordinary item - -   10 -  
Tax 182 140 -23.0% 498 420 -15.6%
Profit after tax/(loss) 605 778 28.6% 1,761 2,132 21.1%
Net profit margin (%) 15.7% 17.9%   15.6% 16.4%  
No. of shares (m) 136.0 136.0   136.0 136.0  
Diluted earnings per share (Rs)*         19.8  
Price to earnings ratio (x)*         21.4  
* Trailing 12-month earnings

What has driven performance in 3QFY09?
  • Colgate reported a topline growth of 13% YoY during 3QFY09. A strong volume growth of 14% in the toothpaste category led to the double digit growth. Sales increased by 15% YoY during 9mFY09. All the key brands “Colgate Dental Cream”, “Active Salt”, and “Cibaca performed well. Colgate continued its leadership status in the toothpaste category with 49.6% market share (Jan08-Dec08). The toothbrush category market share saw an increase of 2.8% taking Colgate’s share to 38% during Jan08–Dec08.It also witnessed a 2.9% gain in the toothpowder category. Colgate’s increase in toothpowder market share may be on account of decline in Dabur’s Red Toothpowder business since this category is witnessing stagnant growth. Its market share now stands at 48.9% during Jan08-Dec08. The company’s brand investing continues to pay off.

    Cost break-up
    As a % of net sales 3QFY08 3QFY09 9mFY08 9mFY09
    Total Cost of goods 38.6% 42.2% 40.4% 41.6%
    Staff Cost 8.7% 8.0% 7.7% 7.7%
    Advertising 16.7% 10.8% 16.2% 15.5%
    Other Expenditure 15.7% 18.1% 15.7% 15.7%

  • The operating margins during the quarter were higher by 0.6% YoY, while for 9mFY09, margins declined marginally by 0.4% YoY. While input and other expenses remained higher, low ad and staff costs aided the increase during the quarter. The key raw materials (Sorbitol and Mentha Oil) continued to face higher prices. The company had taken two price hikes of about weighted 1.5% across the portfolio. The advertising costs decreased in the quarter as media costs and levels of spending declined. Continuing efforts and focused programs to enhance efficiencies and reduce costs led to the savings. The benefits and incentives available from production at the Baddi toothpaste plant have been re-invested in building the strong brand equity. The margins are higher than our expectations.

  • Stable operating margins coupled with lower interest costs and lower tax outgo led to the bottomline jump by 29% YoY and 21% YoY respectively for both the periods under consideration. Excluding extraordinary item of Rs 10 m during 9mFY08 for VRS, the profits are up by 20% YoY. The tax rate has declined on account of its Baddi plant. The effective tax rate for 9mFY09 was 17% compared to 22% in 9mFY08.

What to expect?
At the current price of Rs 423, the stock is trading at a price to earnings multiple of 18.7 times our FY11 estimated earnings. The company has outperformed our estimates. Strong volume growth, aggressive cost cuts, brand building and increasing distribution continue to benefit the company. Effective November 19, 2008 the company sold its shareholding in its wholly owned subsidiary, Colgate-Palmolive (Nepal) Private Limited to Everest Hygiene Products Pvt. Ltd., Nepal, as a going concern for a consideration of Rs. 10.6 m. It also acquired the remaining 25% shareholding of its subsidiary SS Oral Hygiene Products Private Limited for a consideration of Rs. 7.8 m and is planning for the amalgamation of SS Oral Hygiene Products Private Limited with the company. This will benefit the company in further cost savings.

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