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Colgate: Taxing pains hurts bottom line - Views on News from Equitymaster
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Colgate: Taxing pains hurts bottom line
Jun 1, 2011

Colgate-Palmolive (India) Limited has announced its fourth quarter results for financial year 2010-2011 (4QFY11) results. The company has reported a 12.2% YoY gain in sales and 0.3% YoY fall in net profits. Here is our analysis of the results.

Performance summary
  • Sales for Colgate grew by 12.9% YoY during the quarter.
  • Operating (EBITDA) margins for the quarter fell by 2.9% to stand at 24% on the back of increase in raw material costs partially offset by fall in staff costs, advertisement expense and other expenditure.
  • Net profit fell marginally by 0.3% during the quarter. This fall has been due to lower operating income and higher effective tax rate partially offset by higher other income and fall in depreciation charges.
  • For FY11, net profit fell by 5% YoY while net profit margins fell by 3.3% to stand at 17.5%. This performance was due to lower operating income, higher interest costs and sharp increase in effective tax rate, partially offset by increase in other income and fall in depreciation charges.

    (Rsm) 4QFY10 4QFY11 change FY10 FY11 change
    Net sales 5,360 6,012 12.2% 20,352 22,969 12.9%
    Expenditure 3,919 4,569 16.6% 15,367 17,699 15.2%
    Operating profit (EBDITA) 1,441 1,444 0.2% 4,985 5,270 5.7%
    EBDITA margin (%) 26.9% 24.0%   24.5% 22.9%  
    Other income 28 78 178.1% 254 305 20.1%
    Interest 4 4 10.0% 15 33 119.3%
    Depreciation 206 88 -57.3% 376 343 -8.8%
    Profit before tax 1,259 1,429 13.5% 4,848 5,200 7.3%
    Extraordinary item - -   - -  
    Tax 115 288 150.5% 615 1,174 90.7%
    Profit after tax/(loss) 1,144 1,141 -0.3% 4,233 4,026 -4.9%
    Net profit margin (%) 21.3% 19.0%   20.8% 17.5%  
    No. of shares (m) 136 136   136 136  
    Diluted earnings per share (Rs)*         29.6  
    Price to earnings ratio (x)*         30.0  
    * Trailing 12-month earnings

    What has driven performance in FY11?
    • During the year, the company witnessed a volume growth of 12% YoY coming on the back of strong sales of 13% YoY in the toothpaste category. The category increased its volume market share to 53.1% in FY11 from 52.9% in FY10. Contribution from flagship brands like Colgate Dental Cream, Colgate Sensitive, Active Salt, Max Fresh and Colgate Total contributed to the increase in market share. Toothbrush category also saw strong sales with a volume growth of over 18% YoY, with market share standing at 40.3%. In the declining toothpowder market, the company market share stood at 46.4% YoY. New category of mouthwash grew sharply. Market share of Plax mouthwash increased from 7.5% in FY10 to 22% in FY11. 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. During the quarter, the company launched Colgate Plax Complete Care, Colgate Sensitive Pro-Relief and Colgate 360 Sensitive Pro-Relief Toothbrush.

      Cost break-up
      As a % of net sales 4QFY10 4QFY11 FY10 FY11
      Cost of material 28.8% 39.8% 38.2% 38.0%
      Staff costs 7.9% 7.2% 7.8% 8.4%
      Advertisement 15.6% 13.4% 14.7% 15.2%
      Other expenditure 20.9% 15.6% 14.8% 15.5%

    • Operating margins fell by 1.6% YoY. The main reason was increase in staff costs, advertisement cost and other expenditure (all as a percentage of sales). Staff costs increased by 21% YoY while advertisement costs and other expenditure increased by 17% YoY and 18% YoY respectively. However, cost of material grew than top line. This helped prop the operating income.

    • Bottom line fell by 5% YoY during the year as a result of increase in interest cost and a sharp increase in effective tax rates. While interest costs increased by 119% YoY, effective tax rates increased from 12.7% in FY10 to 22.6% in FY11. Effective tax rates came in higher as the company exhausted its 100% tax exemption at its Baddi plant. However, fall in depreciation charges by 9% YoY helped support the bottom line.

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