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Colgate: A year full of smiles - Views on News from Equitymaster
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Colgate: A year full of smiles
May 30, 2009

Performance summary
  • Reports a topline growth of more than 15% YoY during the quarter as well as the full year. Its market share improves to 52.2% (Jan – March 09) from 48.2% last year
  • Operating margins during 4QFY09 improve by 3.9% YoY. For FY09, the margins improve to 20%, up 0.7% YoY.
  • Excluding extraordinary item, the bottomline increases by 27% YoY during FY09.
  • Paid a total dividend of Rs 15 per share for the year (dividend yield of 3.2%).

(Rs m) 4QFY08 4QFY09 % change FY08 FY09 % change
Net sales 4,076 4,722 15.8% 15,367 17,708 15.2%
Expenditure 3,393 3,746 10.4% 12,427 14,193 14.2%
Operating profit (EBDITA) 683 977 42.9% 2,941 3,515 19.5%
EBDITA margin (%) 16.8% 20.7%   19.1% 19.9%  
Other income 37 38 2.7% 203 227 12.0%
Interest 4 1 -63.9% 14 11 -23.6%
Depreciation 55 64 16.5% 198 230 15.7%
Profit before tax 662 950 43.4% 2,931 3,502 19.5%
Extraordinary item - 49   10 49 386.0%
Tax 105 131 24.0% 603 551 -8.7%
Profit after tax/(loss) 557 771 38.3% 2,317 2,902 25.3%
Net profit margin (%) 13.7% 16.3%   15.1% 16.4%  
No. of shares (m) 136.0 136.0   136.0 136.0  
Diluted earnings per share (Rs)*         21.3  
Price to earnings ratio (x)*         22.2  
* Trailing 12-month earnings

What has driven performance in FY09?
  • Low penetration level, strong investments into its brands and focus on its core business is benefitting Colgate and this was clearly visible from the strong volume growth and increase in market share. The company during the quarter saw a topline growth of 16% YoY led by a robust volume growth of 14.9% YoY with a strong 15.2% YoY volume growth in the toothpaste category (best ever reported). Its market share improved to 52.2% (Jan – March 09) from 48.2% last year. For FY09, the sales increased by 15% YoY. This is a combination of 1.2% YoY hike in price and remaining being contributed by volumes. Colgate outpaced industry growth, both in the toothpaste and the toothbrush category during 2008. While the toothpaste industry grew 14.5%, Colgate registered a growth of 18%. In the case of toothbrush, it saw a growth of 17.3% as against the industry growth of 7.6%. While the rural and urban areas both saw a double digit growth, the rural growth was higher than the urban growth as rural contribution to total sales increased from 34% to 35%. The company’s key brands continued to see robust performance. Cibaca now contributes to around 16.5% to total sales and all Low Price Point (LPP) products together contributed 20% to sales, same as last year. While Colgate’s non oral care products are doing well, oral care still contributes 96% to the total sales.

  • The company has continued increasing its distribution reach through direct and indirect channels. Numeric distribution of Colgate toothpaste as on Dec 2008 stood at 81% across India. There has been a significant 24% YoY increase in the number of dentists participating in the OHM programme in 2008. This will help in building the long-term franchise.

  • Reduction in excise duty and judicious cost management helped the company improve its gross margins during the quarter. Operating profits grew by 43% YoY during 4QFY09 mainly on account of the 3.1% YoY reduction in ad spends as a percent of sales. Decrease in new product launches, lower media rates and lower competitive scenario led to the company spend low on ads. For the full year, the company saw a margin expansion of 0.7% YoY. It has taken a price hike of around 2% to 3% across some products during April 2009. Going forward, further price hikes would depend on input costs and the competitive environment. The management, however, does not feel the need for a further price hike as input costs are likely to be lower till 1HFY10.

  • Higher operating margins coupled with lower interest costs and tax outgo led to the 47% YoY growth in the bottomline during 4QFY09 (excluding the extraordinary item – VRS). The tax rate during the quarter declined due to adjustments for the full year FY09. For the full year (excluding VRS), the profits have surged 27% YoY. The tax rate stood at 16% during FY09 as compared to 20% last year.

  • The company sold its Nepal subsidiary. It amalgamated Advanced Oral Care Products and Professional Oral Care Products (Goa subsidiaries) and acquired 75% stake in CC Healthcare Products for a consideration of Rs 19.3 m.

What to expect?
At the current price of Rs 473, the stock is trading at a price to earnings multiple of 20.9 times our FY11 estimated earnings. The company has done well as compared to our estimates. With penetration level of toothpaste being as low as 57% and the per capita level being 108 gm/year which is less than its Asian peers, there is huge scope for the company to grow. While the urban areas are expected to drive consumption, rural areas would drive penetration. While management has indicated that the non oral care business could grow larger than the oral care over a longer period of time, it currently wants to focus on oral care as there is still a large market to be tapped. The new growth is expected to come from consumers upgrading from toothpowders to toothpastes. There has been significant decline in the toothpaste prices to match the toothpowders, which has led to strong growth of the former. On account of its strong brands across price points and huge distribution network, Colgate is all set to benefit. We maintain our positive view on the stock.

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