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Colgate: Volume growth helps profitability - Views on News from Equitymaster

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Colgate: Volume growth helps profitability

May 27, 2010

Colgate-Palmolive (India) Limited has announced its FY10 results. The company has reported a 14.9% YoY and 45.8% YoY gain in sales and net profits respectively. Here is our analysis of the results.

Performance summary
  • Sales for the company grew by 13.5% YoY during the quarter. Of this, 11% growth was derived from volumes while the remaining was due to price increases.
  • Operating (EBITDA) margins for the quarter grew by 7.2% to stand at 27% on the back of fall in raw material costs. However, higher advertisement spending and other expenditure capped operating margin expansion.
  • Net profit increased by 48% YoY during the quarter. This increase has been aided by higher operating income and lower tax expenses.
  • Net profit for FY10 grew by 46% YoY while the net margins grew by 4.4% on the back of higher operating income and lower effective tax rate.

Standalone financial snapshot
(Rs m) 4QFY09 4QFY10 change FY09 FY10 change
Net sales         4,722         5,360 13.5%       17,708       20,352 14.9%
Expenditure         3,794         3,919 3.3%       14,242       15,367 7.9%
Operating profit (EBDITA)            928         1,441 55.3%         3,467         4,985 43.8%
EBDITA margin (%) 19.7% 26.9%   19.6% 24.5%  
Other income 38 28 -26.6%            227            254 11.8%
Interest    1    4 263.6% 11 15 36.4%
Depreciation 64            206 224.4%            230            376 63.7%
Profit before tax            901         1,259 39.7%         3,453         4,848 40.4%
Extraordinary item   -     -       -     -    
Tax            131            115 -11.9%            551            615 11.7%
Profit after tax/(loss)            771         1,144 48.4%         2,902         4,233 45.8%
Net profit margin (%) 16.3% 21.3%   16.4% 20.8%  
No. of shares (m)            136            136              136            136
Diluted earnings per share (Rs)*                   31.1  
Price to earnings ratio (x)*                   22.9  
* Trailing 12-month earnings

What has driven performance in 4QFY10?
  • During the quarter, the company witnessed a volume growth of 11% YoY coming on the back of strong sales of 11% YoY in the toothpaste category. The category increased its volume market share to 53.4% from 51.7% during the previous quarter. Contribution from flagship brands like Colgate Dental Cream, Active Salt and Cibaca contributed to the increase in market share. New products like Colgate Sensitive also contributed to market share growth. Toothbrush also saw strong sales, with increase in market share from 37.8% in 4QFY09 to 41.2% in the current quarter. However, toothpowder continued to lag category growth, losing market share. Market share of toothpowder fell from 49.2% in 4QFY09 to 48.3% currently. Low penetration level, strong investments into its brands and focus on its core business has continued to benefit Colgate and this is clearly visible from the strong volume growth and increase in market share in toothpaste and toothbrush category.
    Cost break-up
    As a % of net sales 4QFY09 4QFY10 FY09 FY10
    Cost of material 42.5% 28.8% 41.9% 38.2%
    Staff costs 8.2% 7.9% 7.8% 7.8%
    Advertisement 14.9% 15.6% 15.3% 14.7%
    Other expenditure 13.7% 20.9% 15.1% 14.8%

  • Operating income grew by 53% YoY during the quarter. The main reason was fall in raw material costs. However, other expenditure was higher during the quarter as a result of amalgamation of financials of Professional Oral Care Products. Advertisement expense also increased as a percentage of sales on brand building activities.

  • Bottom line grew by 48% YoY during the quarter aided by strong operating income growth. Net profit was higher also due to lower tax expense which fell by 12% YoY during the quarter. However, growth in net profit was capped due to lower other income and higher depreciation costs.

What we expect?
At a price of Rs 714, the stock is trading at 24.3 times our estimated FY12 earnings. The company’s investment in brand building is paying off as indicated by a strong volume growth and increase in market share. Moreover, Colgate as a result of its various oral care education programmes is able to fuel incremental growth from conversion from unorganised market to branded toothpaste. The company with its dominant position in Indian oral care markets is well poised to capture industry growth. However, with new entrants on the horizon, competition is set to intensify and this may affect the company margins going forward. For these reasons we believe that growth from a 2 - 3 year horizon is already priced in the stock.

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