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Colgate turnaround: Early days…

Jun 20, 2002

Though Indian oral care major, Colgate Palmolive India, has logged in a 12% net profit growth in FY02, the company's topline has shown over 1% decline in topline YoY. Infact, the company's topline has dipped by 9% YoY in 4QFY02 and bottomline growth stands at 12% during the quarter.

(Rs m) 4QFY01 4QFY02 Change FY01 FY02 Change
Net Sales (incl. Excise duty) 2,933 2,663 -9.2% 11,769 11,609 -1.4%
Other Income 105 109 3.8% 240 309 28.8%
Expenditure 2,625 2,308 -12.1% 10,801 10,544 -2.4%
Operating Profit (EBDIT) 308 355 15.3% 968 1,065 10.0%
Operating Profit Margin (%) 10.5% 13.3%   8.2% 9.2%  
Interest 3 1 -66.7% 3 6 100.0%
Depreciation 70 96 37.1% 202 221 9.4%
Profit before Tax 340 367 7.9% 1,003 1,147 14.4%
Extraordinary income 13 0 - 55 0 -
Tax 160 151 -5.6% 433 449 3.7%
Profit after Tax 193 216 11.9% 625 698 11.7%
Net profit margin (%) 6.6% 8.1%   5.3% 6.0%  
Effective tax rate (%) 47.1% 41.1%   43.2% 39.1%  
No. of Shares (eoy) (m) 136.0 136.0   136.0 136.0  
Diluted earnings per share* 5.7 6.4   4.6 5.1  
P/E ratio   22.2     27.5  
(* annualised)            

The dip in the company's topline indicates a tough market environment. Colgate has managed to grow its bottomline by controlling its raw material expenses. Its raw material costs stood pruned by 7% in FY02. Though advertisement costs in 4QFY02 have declined, for the whole year, ad expenses have actually gone up by 8%. Its ad expenses to sales crept up to 19.9% in FY02 (18.2% in FY01). Raw material cost control was largely responsible for the improvement in operating profit and consequently, the bottomline.

In FY01, Colgate earned Rs 55 m from the sale of assets, which is reflected as an extraordinary income. On the other hand, Colgate also earned Rs 68 m in FY02 as dividends from its Nepal subsidiary, which is part of that year's other income component. After excluding both, net profit actually stood at 11% YoY.

Cost Break-Up
(Rs m) 4QFY01 4QFY02 Change FY01 FY02 Change
Raw material/packaging cost 1,606 1,303 -18.9% 6,443 6,002 -6.8%
Staff cost 141 144 2.1% 539 603 11.9%
Advertising 426 398 -6.6% 2,140 2,310 7.9%
Others 452 463 2.4% 1,679 1,629 -3.0%
Total 2,625 2,308 -12.1% 10,801 10,544 -2.4%

A big positive for the company is that its strong marketing and sales support initiatives are showing results. Colgate's value market share of toothpastes has improved from 46.5% in Dec 2001 to 49.6% in April 2002. However, the market itself doesn't seem to be growing.

Colgate's market cap declined dramatically over the last few years owing to HLL gnawing its market share. With Colgate showing signs of reversing that trend it should ideally see an improvement in market cap. However, it is still early days yet. As per reports, HLL seems to have lost share owing to the discontinuation of its herbal variant 'Aim'. Also, Colgate has to find ways to increase the size of the oral care market, which stands at Rs 21 bn.

At Rs 141 the stock trades at a P/E of 28x and market cap to sales of 1.8x FY02 earnings. In the long term, we believe that Colgate will continue its domination of the Indian oral care market. However, its early days yet to say that Colgate is on the turnaround path for good.


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