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Colgate: Profits remain depressed - Views on News from Equitymaster

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Colgate: Profits remain depressed
Jun 12, 2013

Colgate-Palmolive (India) Limited has announced its fourth quarter results for financial year 2012-13 (4QFY13) results. The company has reported a 18.3% YoY increase in sales and 5.8% YoY fall in net profits. Here is our analysis of the results.

Performance summary
  • Revenues grew by 18% YoY in 4QFY13 led by robust offtake in toothpastes and toothbrushes. For FY13, the revenues increased by 17.5% YoY.
  • A steep rise in ad-spends and other expenditure led to 3.9% erosion in operating margin for 4QFY13. During FY13, the operating margin contracted by 0.7% YoY.
  • The net profits fell by 5.8% YoY on a 0.7% decline in operating profit and higher tax incidence. In FY13, profits increased by 11.3% YoY.
  • The company has announced a third interim dividend of Rs 9 per share. The total final dividend for FY13 works out to Rs28 per share translating into a dividend yield of 2%.

Standalone financial snapshot
(Rs m) 4QFY12 4QFY13 change FY12 FY13 change
Total Revenue 7,029 8,315 18.3% 26,932 31,638 17.5%
Expenditure 5,331 6,629 24.4% 21,147 25,070 18.6%
Operating profit (EBDITA) 1,699 1,687 -0.7% 5,785 6,568 13.5%
EBDITA margin (%) 24.2% 20.3%   21.5% 20.8%  
Other income 131 121 -7.7% 507 499 -1.5%
Interest 2 -   15 -  
Depreciation 100 113 12.5% 393 437 11.2%
Profit before tax 1,728 1,695 -1.9% 5,884 6,630 12.7%
Extraordinary item - -   - -  
Tax 420 463 10.1% 1,419 1,663 17.2%
Profit after tax/(loss) 1,307 1,232 -5.8% 4,465 4,968 11.3%
Net profit margin (%) 18.6% 14.8%   16.6% 15.7%  
No. of shares (m)         136  
Diluted earnings per share (Rs)*         36.5  
Price to earnings ratio (x)*         37.9  
* Trailing 12-month earnings

What has driven performance in 4QFY13?
  • Colgate posted 18.3% rise in turnover backed by 12% volume growth in toothpaste and 11% rise in offtake of toothbrush. The company increased its leadership position in the toothpaste category by 1.3% to 55.4%. In the toothpaste category, its market share rose by 3.8% to 41.5%. In the emerging mouthwash category, Colgate's market share grew marginally to 26.5%.

    As a % of net sales 4QFY12 4QFY13 Change in basis points
    Cost of goods 39.09% 38.75% -34.51
    Staff costs 7.4% 8.4% 99.63
    Advertisement 8.3% 9.9% 157.64
    Other expenditure 21.1% 22.7% 165.44

  • The company's operating margin reduced sharply by 3.9% YoY on account of a steep increase in other expense and ad-spends. As a proportion of sales, each of the ad-spends and other expense jumped by upto 1.7% during the quarter. Its cost of goods sold was marginally down.

  • Colgate's net profit declined by a faster 5.8% due to higher tax outgo coupled with a 7.7% fall in other income earned during the quarter. The tax incidence during the quarter rose to 27% from 24% in the year-ago quarter.

What to expect?
Colgate has posted a robust set of financials in FY13. The company clocked a sales growth of 17.5% led by volumes as price-hikes and premium-mix contributed a mere 6% rise. However, the company's margins remained depressed due to a steep rise in ad-spends. Going forward, the competitive intensity is set to increase further with the reported entry of Oral B in the toothpaste space. Even other players such as HUL and Glaxo SmithKline Consumer have increased their promotions in the fast growing sensitive oral care segment. Therefore Colgate's promotional spends are expected to remain high. Even tax incidence is set to rise as its Baddi plant loses its tax exemption status in future. Thus, the company's profitability is expected to remain under pressure in future.

At a price of Rs 1385, the stock is trading at 28 times our estimated FY15 earnings. We had given a SELL on this stock. At current valuations, the stock is overvalued and we re-iterate a SELL on the stock.

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