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Colgate: Improving share

May 2, 2001

Colgate had reported an impressive double-digit growth in the topline for the first nine months of FY01. Although operating margins dipped by 70 basis points, profits jumped by 22% thanks to higher other income (on account of sale of residential apartment). As per the latest ORG-Marg data for March, Colgate has gained market share in toothpaste by 0.2% to 48.8%. On the other hand its nearest rival HLL has lost 0.4% to 34.9% in the segment. Over the last six months also, Colgate gained a market share of 1.1% in value terms and 2.2% in volume terms. Its key brands ‘Colgate Dental Cream’, ‘Colgate Herbal’ and ‘Colgate Cibaca Top’ were the main growth drivers.

The company 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 aid in improving its volume growth further in the fourth quarter of the year ended March ’01.

Financial snapshot
(Rs m) FY00 FY01E Change
Net sales 10,737 12,080 12.5%
Other income 152 200 31.6%
Total revenues 10,889 12,280 12.8%
Operating profit 981 991 1.0%
Depreciation 232 160 -31.0%
Interest 2 -  
Profit before tax 899 1,031 14.6%
Tax 381 433 13.6%
Profit after tax 518 598 15.4%
Number of shares (m) 136 136  

Key ratios
Particulars FY00 FY01E
Operating profit margin 9.1% 8.2%
Effective tax rate 42.4% 42.0%
Net profit margin 4.8% 4.9%
EPS (Rs) 3.8 4.4

Stiff competition and rising promotional expenses are however, putting pressure on Colgate’s margins. The company’s OPM is one of the lowest in the FMCG industry. Sliding margins is a concern considering the fact that its peers in the industry are continuously improving the margins through cost control and working capital efficiencies. The oral care market being price sensitive, it is becoming difficult for the company to raise margins through price hikes. Colgate’s established brands and pro-active management strategies are nevertheless expected to drive its future performance.

At the current market price of Rs 178, Colgate is available at a P/E of 40 times its FY01 projected earnings. Its lower market cap to sales ratio of 2 times suggests that its long-term growth is a concern with the sluggish growth in the rural economy (Colgate derives more than 30% of its revenues from rural India) and the intense competition.

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