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Colgate: Mixed signals - Views on News from Equitymaster

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Colgate: Mixed signals

May 30, 2008

Performance summary
  • Topline grows by 14% YoY both for 4QFY08 and FY08 led by higher volume sales.
  • Operating margins decline by 0.5% on account of higher ad spends for the full year.

  • Excluding the extraordinary item (VRS and other credits) bottomline grows by 25% YoY for FY08. The net profits are up 12% YoY in 4QFY08.

  • The board has declared a dividend of Rs 7 per share (dividend yield of 1.7%).

(Rs m) 4QFY07 4QFY08 % change FY07 FY08 % change
Net sales 3,433 3,913 14.0% 12,951 14,734 13.8%
Expenditure 2,897 3,408 17.6% 10,863 12,438 14.5%
Operating profit (EBDITA) 535 506 -5.6% 2,089 2,296 9.9%
EBDITA margin (%) 15.6% 12.9%   16.1% 15.6%  
Other income 174 214 23.3% 670 848 26.5%
Interest 3 4 44.0% 10 14 46.9%
Depreciation 37 55 49.3% 153 198 30.0%
Profit before tax 670 662 -1.3% 2,596 2,931 12.9%
Extraordinary item 8 -   580 10 -98.3%
Tax 172 105 -38.7% 414 603 45.6%
Profit after tax/(loss) 506 556 9.9% 1,602 2,317 44.6%
Net profit margin (%) 14.7% 14.2%   12.4% 15.7%  
No. of shares (m) 136.0 136.0   136.0 136.0  
Diluted earnings per share (Rs)*         17.0  
Price to earnings ratio (x)*         24.4  
* Trailing 12-month earnings

What has driven performance in FY08?
  • Colgate’s topline grew by 14% YoY for FY08 backed by 9% YoY growth in volume sales during the quarter and the full year. The company had taken a 4.5% hike in the prices during the year. For the quarter, the toothpaste category reported a 10% YoY growth in volume sales, while sales from the toothbrush segment grew by 20% YoY. The toothpowder category too witnessed some growth in volumes. Given that consumers in the lower end of the pyramid are shifting from toothpaste to toothpowder on account of higher prices of the former, the sales of the toothpowder segment have received a boost. Colgate launched a red toothpowder ‘ Cibacca Lal Dantmajan’ during the year. Colgate has been able to enhance its market leadership in toothpastes, toothpowder, and toothbrush categories. In toothpaste, the company’s market share stood at 48.4%, while in toothbrush it was 34.9%. During the year, the company has been aggressive in increasing its penetration and investing in brands. The topline is in line with our estimates.

    Cost break-up
    As a % of net sales 4QFY07 4QFY08 FY07 FY08
    Total Cost of goods 44.8% 45.2% 44.5% 42.9%
    Staff Cost 7.3% 7.9% 8.6% 8.0%
    Advertising 18.6% 18.8% 16.0% 17.4%
    Other Expenditure 13.6% 15.3% 14.7% 16.1%

  • The operating margins for 4QFY08 fell by 2.7%, while for the full year they fell by 0.5%. The company spent more on brand building activities and will continue to do so going forward as the market is highly competitive and the level of penetration is still low. The other expenses too were on the higher side. Further, with raw material prices increasing, the margins are expected to face pressure going forward.

  • Excluding the extraordinary items (VRS and other credits), the net profits for FY08 grew by 25% YoY led by higher other income and stable tax outgo. For 4QFY08, excluding the extraordinary item (VRS), the net profits grew by 12% YoY. The net margins are in line with our estimates.

What to expect?
At the current price of Rs 416, the stock is trading at a price to earnings multiple of 19.2 times our FY10 estimated earnings. Colgate’s plant at Baddi successfully increased its output by 40% over the previous year. This has helped the company meet the higher demand and also benefit from tax savings. Colgate continues to re-invest in new products and to build strong brand equity. With the sector being highly competitive, the move to invest in brand building is expected to pay off in the long run and this has been amply demonstrated by the fact that Colgate continues to be the most recommended and used oral care brand. Also, its strategy to increase distribution and penetration would aid its growth forward. The management is positive on the growth front. However, higher raw material prices and ad spends would put pressure on the company’s margins in the medium term. We shall soon update our research report on the company.

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