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Colgate: Will the smile continue? - Views on News from Equitymaster
 
 
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  • Mar 21, 2001

    Colgate: Will the smile continue?

    The stock price of oral care major, Colgate, has witnessed a marginal decline of 6% since the beginning of the year while the Sensex has lost 7%. Further, in the last one-year (from March 16, ’00) while the Sensex has crashed by 29%, Colgate gained 2%. What is of more interest is the fact that when the stock prices of most of TMT majors crashed to a new 52-week low, during this period, Colgate remained relatively stable.

    Colgate reported an encouraging growth of 10% in its topline and 22% in profits for the 9 months ended December ’00. A strong volume growth of 13% in oral care and personal care sales in the third quarter of FY01, spurred the revenues growth. Its key brands ‘Colgate Dental Cream’, ‘Colgate Herbal’ ‘Colgate Cibaca Top’ and ‘Palmolive Naturals’ (the popular soap brand) were the main growth drivers. The sales growth reflects an improvement in the company's toothpaste market share since September on an all India basis.

    Financial overview
    (Rs m) 9 m FY99 9 m FY00 9 m FY01 3 yrs CAGR
    Net Sales 7,505 8,126 8,909 9.0%
    Other Income 56 130 165 71.7%
    Total Expenditure 6,943 7,462 8,237 8.9%
    Operating Profit 618 794 837 16.4%
    Interest 2 1 - -100.0%
    Depreciation 166 191 132 -10.9%
    Profits Before Tax 450 602 705 25.2%
    Tax 175 248 273 24.8%
    Profits After Tax 275 354 432 25.4%
    No. of shares (m) 136 136 136  

    Ratio analysis
    Particulars 9 m FY99 9 m FY00 9 m FY01
    Operating profit margin 7.5% 8.2% 7.5%
    Tax / PBT 38.9% 41.2% 38.7%
    Net profit margin 3.6% 4.3% 4.8%
    Cash EPS (Rs) 4.32 5.34 5.53
    EPS (Rs) 2.69 3.47 4.23

    In an initiative to further grow its volume and market share Colgate launched its biggest consumer promotion in December, ‘Colgate Ke Andar Kya Hai?’ spread across its oral care and personal care brands. This offer provides a hidden surprise in every purchase. The project is expected to boost its volume growth further in the fourth quarter for the year ending March ’01.

    Stiff competition from the markets has however put pressure on its margins. Colgate’s operating margins, which are one of the lowest in the FMCG industry, dropped by 70 basis points to 7.5% in the first nine months of the current fiscal. This is discouraging considering the fact that its peers in the industry are continuously improving the operating margins through cost control and working capital efficiencies.

    Rising promotional expenses are squeezing the margins of Colgate quarter on quarter. During the 3QFY01, advertisement to sales ratio jumped to 21.5% from 16.8% in the corresponding previous quarter. The company’s nearest competitor HLL (with brands like ‘Close-up’, ‘Pepsodent’ and ‘Aim’) and SmithKline Consumer (‘Aqafresh’) are all set to put a dent in its leadership position in the oral care market. As a result it is becoming difficult for Colgate to increase operating margins through price hike since the dental care segment is a price sensitive market.

    The only option for the company seems to be frequent launch/re-launch of products and foraying into other areas like fabric care and household care where Colgate worldwide (parent company of Colgate India) enjoys a leading position. Colgate has recently launched premium toothbrush ‘Colgate Navigator’, which has gained wide consumer acceptance and is leading the growth in this category. In the personal care category too, the company introduced transparent ‘Palmolive Naturals’, premium skincare soap. The new soap is available in visually stunning translucent bars packed in see through wrappers - a first in India.

    At the current market price of Rs 158, Colgate is available at a P/E of 38 times its FY01 projected earnings. Its lower market cap to sales ratio of 1.8 times suggests that its long-term growth is a concern, as the market growth remains low and the competition intensifies.

     

     

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