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Colgate: Margins hit in FY14
Jun 24, 2014

Colgate-Palmolive (India) Limited has announced its fourth quarter results for financial year 2012-13 (4QFY14) results. The company has reported a 13% YoY increase in sales and 7% YoY rise in net profits. Here is our analysis of the results.

Performance summary
  • Topline grew by 11.5% YoY in 4QFY14 on 7% volume growth in toothpastes. For the full year FY14, revenues increased by 13% driven by 9% rise in offtake of toothpastes.
  • Operating margin expanded by 1.5% YoY in 4QFY14 aided by rationalization in staff costs. However for FY14, the operating margin contracted by 2.2% YoY due to steep rise in other expenses and ad-spends.
  • At the net level, margin declined by 0.5% YoY in 4QFY14 due to higher depreciation outgo and extraordinary expense coupled with fall in other income earned. For FY14, net margin was down by a mere 0.6% YoY aided by proceeds of Rs 599 m from the slump sale of Colgate Global Business Services.
  • The company has declared a third interim dividend of Rs 9 per share on a face value of Rs 1 per share. This is in addition to two interim dividends of Rs 9 each paid earlier. With a total dividend declared of Rs 27 per share, the dividend yield works out to 2%.

Standalone financial snapshot
(Rs m) 4QFY13 4QFY14 change FY13 FY14 change
Total Revenue 8,315 9,273 11.5% 31,638 35,788 13.1%
Expenditure 6,629 7,254 9.4% 25,070 29,148 16.3%
Operating profit (EBDITA) 1,687 2,019 19.7% 6,568 6,640 1.1%
EBDITA margin (%) 20.3% 21.8% 1.5% 20.8% 18.6% -2.2%
Other income 121 39 -67.4% 499 503 0.8%
Interest - -   - -  
Depreciation 113 153 35.8% 437 508 16.1%
Profit before tax 1,695 1,905 12.4% 6,630 6,636 0.1%
Extraordinary item - (62)   - 644  
Tax 463 521 12.5% 1,663 1,881 13.1%
Profit after tax/(loss) 1,232 1,323 7.4% 4,968 5,399 8.7%
Net profit margin (%) 14.8% 14.3% -0.5% 15.7% 15.1% -0.6%
No. of shares (m)         136  
Diluted earnings per share (Rs)*         39.7  
Price to earnings ratio (x)*         38.5  
* Trailing 12-month earnings

What has driven performance in 4QFY14?
  • Colgate recorded a 12% YoY revenue growth led by 7% volume growth in toothpastes. The company continued to consolidate its leadership position in the toothpaste category growing its volume market share by 170 basis points YoY to 57.1% for the period Jan-April 2014. In the toothpaste category, its volume market share rose by 100 basis points YoY to 42.3% during the period Jan-April 2014.

    As a % of net sales 4QFY13 4QFY14 Change in basis points
    Cost of goods 38.75% 39.46% 71.18
    Staff costs 8.4% 4.7% -369.31
    Advertisement 9.9% 10.7% 85.26
    Other expenditure 22.7% 23.4% 64.05

  • The operating margin improved by 1.5% YoY backed by cut in staff costs. As a proportion of sales, staff costs fell by 3.6% YoY. These savings more than offset higher input costs, ad-spends and other expenses (all as a proportion of sales) translating into higher profitability for the quarter.

  • However at the net level, margin declined by 0.5% YoY on account of a 36% jump in depreciation outgo coupled with extraordinary expense of Rs 62 m booked for the quarter. Even other income was down by 67.4% YoY during the quarter.
What to expect?
Colgate's profitability has been hit by higher operational expenses on rising competition. But its long term prospects remains strong on market leadership, robust brand equity and vast distribution reach. To service growing demand from growing penetration and premiumization, the company commissioned a toothpaste facility at Sanad in Gujarat in March 2014. Colgate will commission its toothbrush facility at Sricity in Andhra Pradesh in the fourth quarter of 2014.

At a price of Rs 1,527, the stock is trading at 39 times its trailing twelve months earnings. We had given a BUY at lower level on this stock. At current valuations, the stock remains overvalued and we re-iterate that subscribers do not BUY the stock at current levels.

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