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Colgate: India Vs Pakistan - Views on News from Equitymaster
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Colgate: India Vs Pakistan
Apr 6, 2005

Well don’t let your mind loose, nor jump to any conclusions, we aren’t analyzing the ongoing cricket series between the two-archrival neighbours, but simply comparing Colgate-Palmolive’s presence in both the countries. Let’s see how the oral care major has grown over the past 5 years in these two neighbouring economies.

Background
Colgate-Palmolive India Ltd:  Promoted by Colgate-Palmolive USA, the parent operates through its 51% subsidiary and has a presence in India since last 50 years. The company’s flagship product, Colgate Dental Cream is the largest selling toothpaste in India, with an estimated market share of over 30%. The company acquired Hindustan Ciba Geigy (Cibaca) in the year 1994, which helped it increase its market share. The company also has a significant marketshare in the toothbrush category. This and shaving brushes accounted for 10% of its FY04 revenues.

(Rs m) FY00 FY01 FY02 FY03 FY04 CAGR
Net sales 10,896 11,769 11,609 9,474 9,392 -4%
Other Income 229 295 310 358 299 7%
Expenditure 10,231 10,801 10,544 8,170 7,928 -6%
EBITDA 665 968 1,065 1,304 1,464 22%
Operating margin % 6.1% 8.2% 9.2% 13.8% 15.6%  
Net profit after Tax(Loss) 518 625 698 887 1,080 20%
Net profit margin % 4.8% 5.3% 6.0% 9.4% 11.5%  

Colgate-Palmolive Pakistan Ltd:  Colgate-Palmolive Company Inc (USA) has a 51% equity holding in Colgate - Palmolive (Pakistan) Limited with a presence spanning over 25 years. The company's principal activities are to manufacture and sell detergents, personal and other products. Unlike India, the company has products in four core categories: Oral care (toothpaste, toothbrushes), Fabric care (detergents), Household surface care and Personal care (Palmolive soaps, shampoos etc).

(INR m) FY00 FY01 FY02 FY03 FY04 CAGR
Net sales 1,109 1,424 1,639 1,996 2,415 21%
Other Income 3 3 5 9 12 35%
Expenditure 1,031 1,302 1,479 1,775 2,075 19%
EBITDA 79 123 160 221 341 44%
Operating margin % 7.1% 8.6% 9.8% 11.1% 14.1%  
Net profit after Tax(Loss) 43 70 88 128 210 49%
Net profit margin % 3.8% 4.9% 5.4% 6.4% 8.7%  
* 100 Pakistani Rs = 73 Indian Rs

The journey over the years…
From the above tables, we infer that the Pakistani counterpart has grown at a much faster pace as compared to its Indian neighbour, mainly due to low base effect and the fact that competition there is not as fierce, as in India. Revenues of the Pakistani listed entity are about a quarter (25%) of the listed Indian operations. Margins for both the countries have grown in a similar pattern and are decent for an FMCG firm.

India is the 2nd most populous country on earth while Pakistan the 9th. Per capita consumption of toothpaste as per company estimates is approximately 82 gms in India. Though we do not have actual per capita consumption figures for Pakistan, it is estimated to be more than 2 times india’s per capita number. When compared to other developed nations like USA where the per capita consumption is close to 520 gms, there is huge growth potential for both the countries going forward. Also, the parent globally, has decided to close a third of its 78 manufacturing units and India could be a favored destination for outsourcing toothpaste. Currently, the China plant produces over 900 m toothbrushes per year and supplies to over 60 Colgate subsidiaries worldwide. The parent has a 5-year plan of cutting down toothpaste and bar soap manufacturing locations to 15 each and toothbrush manufacturing locations to 8 globally.

The product folio of Pakistan also consists of brands besides oral care (Brite Total, Azadi Bar and Express Power detergent), which have been developed exclusively for its local patrons, while its offerings in India mainly mirror the parent with international brands largely oral care and Palmolive range.

What to expect?
At the current price of Rs 180, the Colgate India stock trades at a rich valuation of 23x annualised 9mFY05 earnings and market cap to sales of 2.6x. Though per capita consumption of oral care products in India is poor compared to even other developing nations, it is essentially a long-term story. In our view, the prospects of the company are still too leveraged on one product, which is facing intense competition in the market. With P&G’s intended entry in the segment, things could get rough in FY06 and FY07.

Colgate Pakistan trades at a price of Rs 193 (approximately), at a P/E multiple of 12x FY04 earnings and market cap to sales of 1x.

In our view, both countries have immense growth potential in time to come. However, India could turn out to be a key beneficiary of the parent’s cost cutting moves.

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