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Colgate: Say 'Cheez' - Views on News from Equitymaster

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Colgate: Say 'Cheez'

Feb 4, 2008

Performance summary
  • Colgate witnesses topline growth of 14% for 3QFY08 and 9mFY08.
  • Operating margins remain stable at 17%.

  • Bottomline grows by 20% YoY and 61% YoY for 3QFY08 and 9mFY08 respectively.

  • The company expands its reach to cover 175 cities and towns in 19 states across the country during the year.

(Rs m) 3QFY07 3QFY08 % change 9mFY07 9mFY08 % change
Net sales 3,223 3,675 14.0% 9,519 10,821 13.7%
Expenditure 2,679 3,064 14.4% 7,966 9,031 13.4%
Operating profit (EBDITA) 544 611 12.3% 1,553 1,790 15.2%
EBDITA margin (%) 16.9% 16.6%   16.3% 16.5%  
Other income 166 228 37.1% 497 634 27.7%
Interest 3 2 -31.0% 7 11 47.9%
Depreciation 44 51 15.8% 116 144 23.9%
Profit before tax 664 787 18.4% 1,926 2,269 17.8%
Extraordinary item - -   (588) (10)  
Tax 161 182 13.2% 243 498 105.3%
Profit after tax/(loss) 503 605 20.1% 1,096 1,761 60.7%
Net profit margin (%) 15.6% 16.5%   11.5% 16.3%  
No. of shares (m) 136.0 136.0   136.0 136.0  
Diluted earnings per share (Rs)*         16.7  
Price to earnings ratio (x)*         25.6  
* Trailing 12-month earnings

What has driven performance in 3QFY08?
  • Colgate’s topline increased by 14% YoY during both the periods under consideration. It witnessed a strong volume growth of 8% YoY both in the toothpaste and the toothbrush category for 9mFY08. The company’s market share in toothpaste touched 49.2% during the period January–November 2007, while that in toothbrush segment increased to 35.2%. It also launched variants under the Pamolive brand in the body wash segment. Though the urban areas are matured, the company continues its growth through higher market share and has constantly introducing newer variants and higher value products. The rural markets would however be the major growth driver going forward. We believe that Colgate will likely sustain a double-digit growth in the coming quarters.

    Cost break-up
    As a % of net sales 3QFY07 3QFY08 9mFY07 9mFY08
    Total Cost of goods 45.8% 40.3% 44.4% 42.1%
    Staff Cost 9.4% 9.1% 9.1% 8.0%
    Advertising 14.0% 17.5% 15.1% 16.9%
    Other Expenditure 13.9% 16.4% 15.1% 16.4%

  • While raw material costs and labour expenses witnessed a reduction as percentage of sales, advertising and other expenses rose in 3QFY08 and 9mFY08. The company continues to invest in its equity and brand-building activities, thereby increasing the ad spends from 14% of sales in 3QFY07 to 17.5% in the current quarter. This year Colgate significantly expanded its reach to cover 175 cities and towns in 19 states across the country, touching 250 rural and remote sites, as against 102 cities in 2006. The operating profit before ad spend increased 26% YoY in 3QFY08.

  • The net profits for 3QFY08 grew by 20% YoY led by stable operating margins and higher other income. For 9mFY08, excluding the extraordinary item in 9mFY07 (VRS), the net profits grew by 5.2% YoY.

What to expect?
At the current price of Rs 426, the stock is trading at a price to earnings multiple of 19.6 times our FY10 estimated earnings. The company has also acquired 75% equity shareholding in Advanced Oral Care Products Pvt. Ltd, Goa, Professional Oral Care Products Pvt. Ltd., Goa and SS Oral Hygiene Products Pvt. Ltd., Hyderabad, which are engaged in the manufacture of toothpaste. They have been manufacturing and supplying toothpaste to the company for last several years. Though much detail about the deal is not given, the move would help the company reduce the outsourcing expenses. Further, the growth in Colgate’s core business could be gauged from the fact that in last 2 years, the company is witnessing strong volume growth. Also as per the management, ad-spend is likely to remain high as the company continues to invest in strengthening brand equity and improving oral awareness. With the industry being characterised by low penetration and low per capita usage, Colgate stands to gain with its wide range of products in the oral care category across all the price points and its wide distribution network. With results in line with our expectations, we remain positive on the stock.

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