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Colgate: Bad quarter, good year!
Apr 26, 2006

Introduction to results
Oral care major, Colgate India (Colgate), announced its results for the fourth quarter and full ended March 2006 today. The company has reported a robust topline growth during the quarter, backed by uptrend in oral care consumption, as well as new product launches. However, margin contraction of 270 basis points, along with lower other income, saw bottomline growth trailing topline during 4QFY06. The company closed its books with a good 17% YoY topline and a better 22% bottomline growth in FY06.

(Rs m) 4QFY05 4QFY06 Change FY05 FY06 Change
Net Sales 2,400 3,021 25.8% 9,642 11,242 16.6%
Expenditure 1,973 2,564 29.9% 7,968 9,299 16.7%
Operating Profit (EBDIT) 427 457 6.9% 1,674 1,943 16.0%
Operating Profit Margin (%) 17.8% 15.1%   17.4% 17.3%  
Other Income 126 50 -60.4% 342 256 -25.2%
Interest 2 2 -14.3% 12 6 -49.1%
Depreciation 58 37 -35.0% 224 314 40.5%
Profit before Tax 493 467 -5.3% 1,781 1,879 5.5%
Tax 170 97 -42.8% 649 503 -22.5%
Profit after Tax 323 370 14.4% 1,133 1,376 21.5%
Net profit margin (%) 13.5% 12.3%   11.7% 12.2%  
Effective tax rate (%) 34.4% 20.8%   36.4% 26.8%  
No. of Shares (m) 136.0 136.0   136.0 136.0  
Diluted earnings per share* (x)         10.1  
P/E ratio (x)         39.9  

What is the company’s business?
The ‘Colgate’ brand is synonymous with oral care in India. The company has successfully created a strong brand image and awareness in the minds of consumers over the last fifty years. Colgate earns around 95% of its revenues from the oral care segment. The company leads the 90,000 TPA oral care market with nearly 50% share. The oral care market has a penetration of only around 49% in India. The company also has a small presence in the personal products category with brands such as Palmolive (soaps, shaving products) and Charmis (face cream). The company has discontinued the manufacture of toilet bar soaps (Palmolive) from 3QFY06, which it now imports through one of the subsidiaries of its parent.

What has driven performance in FY06?
It’s all about new launches: During the year, the company launched three new toothpaste variants (Colgate Advanced whitening, Active salt and Max fresh gel) all of which gave an impetus to the topline growth. Active Salt now contributes 5% to Colgate’s revenues. The company witnessed a 10% volume growth (20% in 4QFY06) during the year, backed by sustained growth from urban as well as rural markets. In the toothbrush category, the company launched a toothbrush with a tongue-cleaning feature, the first of its kind in the country and drove sales of the segment. However, toothpowder sales declined by 5% in FY06, as penetration of toothpastes increased along with shifting from toothpowder to toothpastes. Also, the company is closely working with ITC’s e-choupal network to enhance sales in the rural hinterland.

Cost break-up
as a % of net sales 4QFY05 4QFY06 FY05 FY06
Total Cost of goods 49.9% 44.4% 50.1% 45.0%
Staff Cost 8.7% 6.4% 7.8% 7.7%
Advertising 13.6% 19.7% 14.2% 17.6%
Other Expenditure 10.1% 14.4% 10.6% 12.5%
Total Expenditure 82.2% 84.9% 82.6% 82.7%

Margins take a hit: As mentioned earlier, the company launched various products in the course of the year. In order to increase the visibility of these products, the company upped its advertising expenditure both during the quarter and FY06 considerably. Also, other expenditure increased due to higher service tax and freight costs clubbed with a write-back in FY05 to the tune of Rs 50 m. All these increased costs nullified the effect of reduced raw material costs and a marginal decline in staff costs.

Bottomline paced by less taxes: Colgate registered a bottomline growth of 22% YoY during the year despite a 25% fall in other income and a significant (up 41% YoY) rise in depreciation charges due to reassessing its research and analytical equipment. Profit growth was largely led by a 960 basis points decline in the tax rate, due to its Baddi (a tax haven) plant.

Over the past few quarters
  4QFY05 1QFY06 2QFY06 3QFY06 4QFY06
Sales growth (YoY) 3.9% 6.4% 10.8% 21.2% 25.8%
Advertising as % of sales 13.6% 17.7% 18.5% 14.4% 19.7%
OPM (%) 17.8% 16.1% 15.5% 25.0% 15.1%
Net profit growth (YoY) -12.1% 10.1% 14.5% 46.2% 14.4%

As can be seen from the table above, revenue growth is the highest in 4QFY06. However, on the flip side, bottomline growth despite a low base, has grown at a slower pace. Also, advertising expenditure as a % of sales is the highest in the quarter under review, indicating intensifying competition.

What to expect?
At Rs 404, the stock is trading at a price to earnings multiple of 32.5 times our FY08 earnings estimates and market cap to sales of 4.7x. Although the results have been higher than our estimates for FY06 on the revenue front, the bottomline is on target (we had projected an EPS of Rs 10.1 for FY06). We will be updating our research report soon, as we need to upgrade our numbers upwards.

Although we are enthused by the company’s performance on the revenue front, margins are a cause of concern. Though per capita consumption of oral care products in India is poor compared to even other developing nations, we believe that Colgate 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. The company is likely to see bottomline expansion over the next year owing to tax benefits and operating leverage but a high sustainable topline growth will remain a challenge. Colgate is not among our top picks from the FMCG sector. But this could change if the parent decides to make Colgate India as one of its key outsourcing hubs for toothpaste.

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