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Colgate: Still not out of the woods - Views on News from Equitymaster
 
 
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  • Jun 10, 2003

    Colgate: Still not out of the woods

    Colgate Palmolive India has reported enthusing numbers for the March quarter. The company's sales are down 2% during the quarter, but this still better than the 8.5% dip in topline witnessed in December quarter. The oral care major has reported a strong 38% bottomline growth led by significant growth in other income, as well as reducing the depreciation provisioning by half.

    (Rs m) 4QFY02 4QFY03 Change FY02 FY03 Change
    Net Sales (incl. Excise duty) 2,663 2,607 -2.1% 11,609 10,569 -9.0%
    Other Income 109 191 75.2% 309 358 15.9%
    Expenditure 2,308 2,288 -0.9% 10,544 9,265 -12.1%
    Operating Profit (EBDIT) 355 319 -10.1% 1,065 1,304 22.4%
    Operating Profit Margin (%) 13.3% 12.2%   9.2% 12.3%  
    Interest 1 0 -100.0% 6 2 -66.7%
    Depreciation 96 45 -53.1% 221 195 -11.8%
    Profit before Tax 367 465 26.7% 1,147 1,465 27.7%
    Tax 151 167 10.6% 449 578 28.7%
    Profit after Tax 216 298 38.0% 698 887 27.1%
    Net profit margin (%) 8.1% 11.4%   6.0% 8.4%  
    Effective tax rate (%) 41.1% 35.9%   39.1% 39.5%  
    No. of Shares (eoy) (m) 136.0 136.0   136.0 136.0  
    Diluted earnings per share* (x) 6.4 8.8   5.1 6.5  
    P/E ratio (x)   16.1     21.7  
    (* annualised)            

    The year FY03 saw a shift in the company's strategy in a bid to save its profitability. The company relied on reducing advertising expenses as well as focused on operating efficiencies. Consequently, the company's operating margins improved for FY03 despite a 9% topline dip. As a result, Colgate finished with a healthy 27% bottomline growth during the year.

    Colgate seemed to have adopted this strategy for most of FY03 in light of the stagnation it saw in oral care market. The dip in advertisement spends could also be attributed to a similar strategy adopted by arch rival, HLL, whose focus was on its other businesses. However, at its last analyst meet, HLL had mentioned that in 2003 its focus would be on its hair care and oral care business. This and the rising share of smaller players like Anchor in the oral care pie seems to have prompted Colgate to up its advertisement budgets in 4QFY03.

    Cost break-up
    as a % of net sales 4QFY02 4QFY03 FY02 FY03
    Total Cost of goods 48.9% 48.9% 51.7% 50.0%
    Staff Cost 5.4% 6.2% 5.2% 6.6%
    Advertising 14.9% 16.9% 19.9% 17.5%
    Other Expenditure 17.4% 15.8% 14.0% 13.6%

    This is evident from the 11% growth in ad spends during the quarter, as advertising to sales went up to 16.5% from 14.5% witnessed in the March quarter last year. Consequently, operating margins declined during the quarter. The company has been rescued by the significant dip in depreciation provisioning and a significant growth in other income during the quarter. But there is no explanation for this dip in provisioning.

    The company has so far declared 2 interim dividends totaling Rs 4.25 per share for FY03. The stock was up sharply in recent times owing to parent buyback rumours, which the company was quick to deny. At the current price of Rs 142, the stock trades at 22x FY03 earnings. Though the lower decline in revenues in 4QFY03 is a positive, the prospects of the company are still too leveraged on one product, which is facing intense competition in the market. The valuation in that sense is streched.

     

     

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    Feb 3, 2016

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